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Retirement Planning > Retirement Investing

Volatility-proof your practice

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How do you insulate your practice and your clients’ life savings from the level of extreme volatility we’ve experienced in the market lately? Before we get to that, we must ask ourselves whether volatility is something we should even concern ourselves with. After all, isn’t experiencing volatility just part of being an investor in risk-based markets?

At the risk of veering off on a tangential topic, I might add that there are machines (“robo advisors”) that can do much of the investing work that advisors have been doing on behalf of their trusting clients. Because technology has accelerated the commoditization of accumulation planning, the role of the human in the investing relationship is evolving. In light of these changes, helping families who are nearing or in-retirement manage the vast number of variables present in their planning, including volatility, may be something we should get really clear on.

The effect of volatility on a retiree’s portfolio can either be significant or benign, depending on how you have their assets positioned. For example, a client who is using a systematic withdrawals retirement income strategy (the “safe withdrawal rate” approach), where they are managing and adjusting annual withdrawals in accordance with the performance of their portfolio, will tend to experience a volatile stock market much differently than a retiree who employs a flooring or a bucketing strategy that matches income from guaranteed income products with their basic lifestyle costs. The second retiree will still experience volatility, but not with the assets that provide them with income to pay basic expenses each month. That is, their volatile, risk-based assets are positioned as “surplus” or discretionary in their retirement plan.

Depending on the approach you choose to introduce and implement with your retiring or retired client, they will have a much different reaction to market volatility as it occurs. Each client is different and may warrant a different approach. The larger issue here is to not only assess their risk tolerance for their investments, but to go even further and apply their risk tolerance, and risk capacity (two different things), to their product allocation as well as their asset allocation.

The client who has a retirement plan that is mis-aligned with their risk tolerance will call you often and complain about the market, while the client who is positioned properly with the most appropriate retirement income strategy will have a very different retirement experience.

As an advisor, are you clear on how the various income strategies work? Could you teach a class on them?

As advisors, our role is very clear, or at least it can be if we get our approach right. Managing volatility and client expectations has little to do with what the market does each day. Instead, our role is to leverage the best attributes of all the investments and financial products available, to offer our retiree clients the experience that suits them best, thus keeping them on-track and on-purpose. There is more to life than watching the market’s daily tantrums…or at least there should be. Let’s do our part, shall we? Volatility-proof your practice by doing right by your clients before they even enter the market in the first place.


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