Client Service May 19, 2021

Advisers Have Their Eyes Keenly Trained on Risk Management

The majority prioritize effective risk management of their clients’ portfolios over generating the highest gains, Allianz found in a survey.

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The inaugural Allianz Life “RIA Retirement Risk Review Study” reveals that registered investment advisers (RIAs) are increasingly concerned about their clients’ retirement security and are willing to explore risk management solutions. In fact, 88% of RIAs are more concerned about efficiently managing the risk in their clients’ portfolios than they are generating the highest possible gains, according to the study.

Fifty-nine percent believe that their clients need to accumulate more money in order to have a financially secure retirement. However, these advisers say most of their clients are too close to retirement to take on the risk of investing in a high-risk/high-reward financial product.

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Seventy-nine percent of advisers said clients who are at or nearing retirement are worried about outliving their money in retirement.

Among those 10 years or more away from retirement, 57% are worried about outliving their money in retirement, 56% are worried about spending too much in retirement and 43% say they are concerned about high health care bills in retirement. Among those who plan to retire in less than 10 years or who are already retired, 56% are worried about spending too much in retirement, 54% are worried they will outlive their money and 53% are worried that the stock market could plummet, causing them to lose a lot of money in their retirement accounts.

“Financial advisers are grappling with a difficult challenge,” says Heather Kelly, senior vice president of advisory and strategic accounts at Allianz Life. “First and foremost, their priority is to protect their clients’ assets. However, advisers also need to ensure clients are generating enough income to enjoy their golden years without financial worries. This dual mandate has only become more complex in today’s historic low-interest-rate environment.”

She continues: “The threat of outliving your money in retirement—also known as longevity risk—is top of mind for financial advisers and clients of all ages. Factors such as inflation and the rising cost of living are raising red flags for many near-retirees and retirees when it comes to longevity risk. Advisers must communicate regularly with clients about these risks and the evolving set of investment solutions available to help meet clients’ needs.”

The survey also asked the advisers what risks their clients’ portfolios face. Thirty-six percent of advisers said that for those more than 10 years away from retirement, it is high equity valuations, followed by taxes (31%) and inflation (30%).

Advisers said the biggest threats for retirees and near-retirees are longevity risk (47%) and low interest rates (44%).

Forty percent of advisers are considering suggesting new risk management solutions to their clients, including low volatility exchange-traded funds (ETFs) (52%), buffered outcome ETFs (44%) and annuities (37%).

“Incorporating new risk-management tools and solutions into a client’s portfolio is not always easy,” Kelly says. “Advisers should conduct extensive due diligence and leverage the expertise of industry providers to help ease concerns and educate clients about evolving strategies.”

Allianz’s findings are based on an online survey it conducted in partnership with Zeldis Research in February and March among 289 advisers.

Data & Research May 18, 2021

Advisers Need to Get Smarter About Life Expectancy

It can be a fraught and distressing topic of conversation, but an honest assessment of a client’s life expectancy is foundational to building an effective financial plan.

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Given his role as the head of retirement research at Morningstar Investment Management, David Blanchett gets to pore over and analyze all different types of data.

During a webinar presentation Tuesday, Blanchett dove into the nuanced and challenging topic of mortality assumptions and life expectancy tables, suggesting this is an area in which the advisory community could be a lot better informed.

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“When do you expect a given client to die?” Blanchett asked. “I’ve looked at the data and I can say confidently that this is one of the most important assumptions that you will factor into any financial plan. Additionally, the evidence clearly suggests that the advisory industry does not do a good job in making these assessments, which has a direct bearing on the quality of the financial plans being delivered to clients.”

Blanchett noted that the concept of “life expectancy” itself is not greatly understood.

“The actual definition of life expectancy is the average number of years a person can expect to have left to live, on average, at a specific given age,” he said. “This is a nuance that is important for advisers to understand.”

Blanchett cited the example that a newborn baby boy’s life expectancy today, in the United States, is about 76. However, for a healthy 65-year-old male, the figure is approximately 83.

“This is a really interesting feature of life expectancy as a concept,” Blanchett said. “In essence, as people get older and approach the ‘normal’ retirement age, their life expectancy increases. At the same time, life expectancy improvements have been very steady over the last century, which has really been remarkable. It’s projected that by the year 2100, a person could expect to live to twice as long after 65 as they would have in the year 1900. That’s remarkable.”

As Blanchett explained, it is essential for retirement plan advisers and wealth managers to understand this dynamic.

“As an adviser, you basically have this effect where the younger and healthier your clients are on average, the more you can expect their life expectancy to increase over time and to be greater than existing retirees,” he said. “We absolutely must factor such things into the actual development of people’s financial plans.”

Blanchett said it is also critical to do an honest assessment of a given client’s lifestyle and health while working on their financial plan. Advisers often assume such factors will have only a moderate effect on the likelihood of a person’s financial plan being successful, but, in reality, the impact can be huge.

“Consider the impact of a behavior like smoking,” Blanchett said. “The data shows this is one of the biggest factors for your clients’ longevity. Also, those with a lot more assets live a lot longer than those with a lot less. I’m speaking with advisers here, and I can say pretty confidently that your clients are very likely going to be those people with more money and more assets. The conclusion is that we may not be accurately projecting people’s retirement arc. We might expect a given client to live to 83, but in reality they could live 10 or 15 years longer than that, which will have a big impact on the plan.”

Blanchett said there is about a 14-year difference alone in the expectancy figure for someone who is in poor health and smokes versus someone who is in excellent health and doesn’t smoke.

“Incorporating this information is central to defining an appropriate expected retirement period,” he said. “There is a huge educational opportunity here for advisers. If you don’t do this work, your clients will not understand how much they need to save, how much they can spend and how long they can expect to enjoy their retirement.”

One other factor to note is that the start date of a person’s retirement is also very important.

“The data shows people tend to retire about four years before they planned to,” Blanchett said. “Obviously, that gap can significantly derail any plan and can really damage people’s standard of living in retirement. One basic rule of thumb is that people who expect to retire over the age 61 will retire earlier than planned, and the further out their expected retirement date is, the bigger the gap between the actual and expected retirement dates. This is obvious in a sense because you cannot simply push back the retirement age because you want to—it’s often out of your control, and more out of your control the older you get.”

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