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High Growth in a Low Rate Environment

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It’s a tough environment for senior clients seeking higher investment yields. The Federal Reserve plans to keep rates low for the foreseeable future, which means that investors and advisors will have to reevaluate their income options. But once clients move beyond guaranteed accounts — an option they’ll probably have to examine — they encounter different risk-return tradeoffs.

Consider dividend stocks, for example. It’s possible to find attractive yields with high-quality equities, and many of these stocks have attracted investor interest as safe-haven plays. Simply buying dividends and ignoring the underlying business fundaments can backfire, though, and investors can’t gloss over the need for stock analysis. James Holtzman, CPA, CFP with Legend Financial Advisors in Pittsburgh points to the recent history of financial stocks. In 2007 those stocks offered some of the highest yields available. The 2008–2009 bear market decimated many of the financials, however, he points out: “The dividend is not going to do any good if the price is going to get crushed.”

Holtzman says his firm is evaluating multiple strategies for clients who need portfolio income. These strategies include a mutual fund that uses a call-writing strategy, closed-end bond funds trading at discounts and bank loan funds. “We like (the loan funds) a lot because the underlying loans are going to have the yield attached to them that is variable in nature,” he says. “So when the rates start to go up, as opposed to getting hurt with more traditional fixed income, you would actually benefit by owning a fund like that.”

Another option that Legend Financial Advisors considers: liquidate investments if necessary. “We’re willing to liquidate some of the investments that generate some of that cash as well, if that’s the right thing to do for the client because you’ve got to manage risk in this environment more than ever,” says Holtzman. “That allows us to rebalance the portfolio and bring it back a little bit more into balance, which is ultimately putting it in position where the client needs it in the first place.”

Master limited partnerships, such as those in the energy business, are also offering attractive yields that can be tax-advantaged for direct investors. For example, as of March 30, the Alerian MLP Index component stocks had an aggregate yield over 6 percent and solid historical returns. MLP-fund investments eliminate Form K-1s for investors, albeit with fewer tax advantages than direct investments.

We asked two experienced senior market advisors to share recent cases in which clients were seeking to boost their retirement income. As their experiences show, it is possible to increase income in a low-rate environment, although there is no single approach that will fit every scenario.

Case #1


Robert K. Haley, JD, CFP, AIF

Advanced Wealth Management

Portland, Ore.

Client: Male, age 60

Initial asset allocation: 60 percent stocks, 40 percent fixed income in 401(k) and IRA accounts. Value of $697,000 with a yield of 1.69 percent as of December 2011.

Reallocated portfolio: “We transferred the $697,000 into an IRA with an agreement to maintain 60/40 asset allocation. We agreed to use individual stocks and income-oriented ETFs for the equity portion, and actively managed bond funds for the fixed-income portion. The dividend yield has now risen to 4.93 percent based on current price, and 5.1 percent based upon his initial investment of $697,000. We also agreed we would have all securities not reinvest. Instead, all dividend and interest income would drop to the money market. That would then be used to pay management fees, and more importantly, to use cash-flow from relatively stable assets to invest in two aggressive equity open-end mutual funds. The idea was that whenever these two funds showed significant gain (say, over 20 percent), we would sell a portion of them to buy more income-oriented securities.

“It is also important to understand that we do not anticipate trends. We work with ranges in mind for U.S. versus international, large companies versus mid- and small, and growth versus value. We also pay attention with our equities to sector allocation. We tend to have at least a 3 percent participation in every sector and no more than 15 percent. Our pattern is to rebalance accounts to all these parameters at least once a year, but we might do so more frequently if the markets are moving radically throughout the year. It is too soon to know if my client will be comfortable with the performance. In the short-term his IRA has underperformed the S&P 500 when the markets are moving up rapidly (first quarter 2012), and outperformed in down markets (second quarter 2012).”

Case #2


Keith O. Moeller, CPA, CFP, CASL

Northwestern Mutual Financial Network


Clients: Husband (57) and wife (56)

Initial asset allocation: 60 percent equities/40 percent fixed income divided over $850,000 in 401(k) plans, $100,000 in additional qualified plan assets and $150,000 in certificates of deposit.

Reallocated portfolio: “What I’ve learned is that if we increase guaranteed income, it puts a person in a position where their assets will last longer. I worked with the clients on a retirement budget, differentiating essential from discretionary expenses. We subsequently began matching essential expenses to guaranteed income sources. Based on their situation, we moved 30 percent of their assets into a guaranteed income product (a joint life annuity with a 20-year period certain), effectively transferring the market risk on that money and the risk of outliving that money to the insurance company. The rest is invested in a well-diversified portfolio, with a roughly 50/50 equity-bond mix. Between the husband’s pension, future Social Security benefits and a guaranteed income product, they can be comfortable with some variability in the balance of their portfolio.

“Looking at the risks to their current program, the guaranteed income portion of their portfolio is subject to inflation risk, which causes loss of buying power if the amount of income does not keep pace with inflation. This is why they have 30 percent in their joint and survivor annuity. The remaining 70 percent of their assets will help address this inflation risk. This proportion was comfortable for them, and in alignment with their goals.”


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