It’s no secret that advisors have embraced model portfolios, having chosen them for more than 50% of their clients’ assets, according to a 2019 Broadridge study — and for good reason. A FlexShares study, “Race to Scalability 2018,” found that the majority of advisors who outsourced investment management grew their client base and realized a 30% revenue increase.
But not all models are created equal, especially when it comes to retirement income.
Given that 75% of workers and retirees prioritize income over maintaining or growing wealth in retirement, according to the Employee Benefit Research Institute, it’s not surprising that traditional retirement solutions focus primarily on income.
But clients also need growth. In fact, EBRI finds that 40% of Americans aged 35 to 65 are expected to run out of money in retirement. The industry’s one-dimensional focus on income has historically tilted client portfolios to lower returning asset classes, like investment-grade fixed income, and hindered the ability to sustain sufficient growth rates over extended periods of time.
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When you couple this tendency with the current lower rate and slower growth market environment that we expect to last for many years, it’s clear that advisors may need to rethink their retirement income solutions.
A Possible Solution?
A better option lies in dynamic multi-asset class portfolios that diversify across more nontraditional sources of both return and income.
For instance, models incorporating outside-the-box asset classes improve the likelihood that a client’s savings will grow enough to fund spending and last through retirement.
While the majority of retirement income models designed to grow over time are traditional 60/40 global stock and bond portfolios, we forecast that these models will earn less than a 4% annual return over the next five years (far less than the 7% of the past 10 years).
Furthermore, we see increased risk on the horizon, as we believe the stock market isn’t factoring in reduced earnings expectations due to COVID-19. Plus there’s uncertainty around the looming U.S. presidential election and tensions are escalating between the U.S. and China.