Advisers as Teachers
How to guide anxious investors through rocky markets.
Reported by Amanda Umpierrez
Among advisers’ most important roles, says Susan Czochara, retirement solutions practice leader at Northern Trust Asset Management, is that of a teacher, who offers guidance and reassurance to participants about risk and market volatility. And, she adds, as individuals with sizable defined contribution (DC) plan balances reach and enter retirement, the adviser must help them address the critical topic of sequence of returns (SOR) risk.
According to Czochara, showing a participant historical data that demonstrate how markets bounce back after corrections or downturns can help allay his worries. Advisers can also explain the upside of diversifying his portfolio and can offer individualized guidance for assessing his risk tolerance. Guidance that is personal and acknowledges his concerns and emotions will obviously be most helpful.
Ed Farrington, executive vice president at Natixis, concurs, noting that participants who feel a sense of reassurance from advisers are likelier to react better during periods of market volatility, even when they are no more knowledgeable about the mechanics of the equity markets. They are also more comfortable with other risks, including longevity, inflation and health care spending.
“The journey is going to be long, and it’s going to have moments where participants can be scared because the market is down or they have a health care expenditure that looks very daunting,” Farrington says. “Much like a personal trainer in a gym, an adviser can provide the assistance and training that’s needed to make the right decisions.”
For a couple retiring today in their early 60s, there is a good likelihood that at least one of them will live well into their 90s, Farrington says. So, the old perception that near-retirees are short-term investors who must invest conservatively is no longer realistic. SOR risk must be considered, he says, but few investment experts would advocate near-retirees take all of their investment risk off the table.
In fact, retirees and near-retirees need to consider growing their capital, due to inflation and longevity risk, Czochara says. Those who choose an overly conservative investment approach and sit on the cash they have accumulated can, over time, lose critical purchasing power or run out of money altogether. “Participants may experience significant purchasing power erosion if their portfolios don’t take into account the impact of inflation,” she stresses.
For that reason, Farrington suggests that advisers talk about risk and return as part of the bigger picture.