SEATTLE--(EON: Enhanced Online News)--Retirement income planning has become a significant or core part of business for nearly three quarters (73 percent) of financial advisors, but these same advisors may be flying blind when it comes to assessing whether clients are on track to achieve sustainable retirement income, according to the Financial Professional Outlook (FPO), a quarterly survey of U.S. financial advisors from global asset manager Russell Investments.
“Advisors and their clients need a meaningful reference point to discuss sustainable income in retirement, and preservation of principal or a rate of return hold very little meaning for an investor trying to fund a desired retirement lifestyle”
According to the survey, there is a clear void of consensus around how to measure whether retired clients are on track with their plans to generate income from investment portfolios. The largest proportion of respondents (34 percent) said they measure clients’ retirement plans based on preservation of principal after distributions, followed by the portfolio’s maintenance of a projected rate of return (20 percent). Only 15 percent of advisors say they assess the net present value of clients’ projected assets against projected liabilities to gauge whether they are on track, which is the method Russell recommends advisors use. Russell calls this concept the “funded ratio.”
“Advisors and their clients need a meaningful reference point to discuss sustainable income in retirement, and preservation of principal or a rate of return hold very little meaning for an investor trying to fund a desired retirement lifestyle,” said Rod Greenshields, consulting director for Russell’s U.S. advisor-sold business. “This reference point needs to be tied to actual desired outcomes. Yet today, very few advisors are approaching retirement income planning in this way.”
Russell’s funded ratio concept is rooted in the firm’s history of working with pension plans, which typically focus on the ratio of assets (investments and future savings) to liabilities (debt and future spending needs) in today’s dollars to assess the status of the plan. By using a retired investor’s personal funded ratio to evaluate whether he or she is on track, an advisor can help clients make informed decisions about their overall readiness for retirement, how much they might spend and what investment strategies may be appropriate.
Most advisors opt for a total-return approach to generating income
Beyond having a framework for measuring progress against goals, investors also need a strategy for generating income – which in Russell’s experience typically falls into two camps:
- A yield-seeking approach using dividends and interest alone to provide income, or,
- A total-return approach that focuses on the overall return of an investment portfolio – including capital appreciation, dividends and interest – to provide income.
In the survey, a large majority (81 percent) of advisors said they rely on a total-return approach.
“We are encouraged to see that so many advisors say they view retirement income through a total-return lens. However, one of the most common questions we hear from advisors regarding retirement portfolios is about yield,” said Greenshields. “Reaching for yield at the expense of sound fundamental analysis can often lead to portfolios with significant credit risk, as well as industry and style biases. To help investors sustain a retirement lifestyle, we believe that generating return through capital appreciation, dividends and income yield in a diversified, multi-asset portfolio is likely the most sensible approach.”
Underlying these strategies, the largest proportion of advisors (78 percent) said that they most often recommend a diversified portfolio of mutual funds to help clients achieve retirement income goals. Other top selections included variable annuities (49 percent), dividend-paying equity funds (48 percent), dividend-paying stocks (48 percent) and fixed income securities (32 percent).
Among the least popular options were fixed annuities (16 percent), immediate annuities (19 percent) and mutual funds designed to produce income in retirement such as managed payout funds and target distribution funds (19 percent).
“With the imminence of rising interest rates and the negative returns offered by cash, investors are considering how to take on acceptable amounts of investment risk to secure the future standard of living they desire,” said Greenshields. “This environment offers an ideal opportunity for advisors to initiate a conversation around the funded ratio and an accompanying planning process that can help answer the question of the appropriate amount of risk in retirement.”
Advisors confident in retirement income planning skills but still seeking tools and resources
The majority of advisors surveyed indicated a high degree of focus and expertise in developing retirement income strategies. Most respondents (61 percent) said they are comfortable dealing with complex retirement income plans, while another 18 percent say they have such deep expertise that others come to them for help.
That said, nearly all advisors are still looking for help in tackling the retirement income challenge. Fifty-three percent said they wish they had planning and implementation tools to increase or maintain their expertise in retirement income planning. Advisors also pointed to their desire for seminars and workshops tailored to their needs (45 percent), tailored self-study materials (35 percent) and access to retirement income specialists (32 percent).
“Despite their focus on retirement income planning, it is telling that advisors continue to demand more resources to help them address this important issue. There is clearly still a gap in the industry response to the retirement income challenge,” said Greenshields. “While some advisors might be wary of addressing the issue with new tools, this is a problem that must be solved with precision. We are well past the point where generalized, ‘back of the envelope’ planning is enough. Advisors and their clients need sophisticated tools and resources that deliver tailored retirement income solutions in a scalable way.”
More about Russell’s Financial Professional Outlook
The current iteration of the FPO survey includes responses from 321 financial advisors working in more than 100 national, regional and independent advisory firms nationwide. The survey was fielded between August 5 and August 19, 2013.
More information about the FPO survey, including a video and a full report of findings, can be found at: www.russell.com/Helping-Advisors/YourBusiness/FinancialProfessionalOutlook.asp.
About Russell Investments
Russell Investments (Russell) is a global asset manager and one of only a few firms that offers actively managed multi-asset portfolios and services that include advice, investments and implementation. Russell stands with institutional investors, financial advisors and individuals working with their advisors — using the firm's core capabilities that extend across capital market insights, manager research, portfolio construction, portfolio implementation and indexes to help each achieve their desired outcomes.
Russell has more than $237 billion* in assets under management (as of 6/30/2013) and works with over 2,500 institutional clients, independent distribution partners and individual investors globally. As a consultant to some of the largest pools of capital in the world, Russell has $2.6 trillion in assets under advisement (as of 12/31/2012). It has four decades of experience researching and selecting investment managers and meets annually with more than 2,200 managers around the world. Russell traded more than $1.4 trillion in 2012 through its implementation services business. Russell also calculates approximately 700,000 benchmarks daily covering 98% of the investable market globally, which includes more than 80 countries and more than 10,000 securities. Approximately $4.1 trillion in assets are benchmarked to the Russell Indexes.
Headquartered in Seattle, Washington, Russell operates globally, including through its offices in Seattle, New York, London, Paris, Amsterdam, Sydney, Melbourne, Auckland, Singapore, Seoul, Tokyo, Toronto, Chicago, San Diego, Milwaukee and Edinburgh. For more information about how Russell helps to improve financial security for people, visit www.russell.com or follow @Russell_News.
*includes $69 billion of derivative overlay assets under management not included prior to June 30, 2013
Russell Financial Professional Outlook is a product of Russell Investments, produced independently of Russell Investments and manager research servcies. Advisors surveyed do not necessarily use Russell products.
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