Tim Dowling
Capturing the retirement opportunity through the sheer demographic wave presents a sizeable opportunity for financial advisers; yet investing for optimal retirement outcomes and navigating the ‘triple threat’ to retirement portfolios has never been more challenging.
These were the main themes at an Allianz Retire+ webinar this week, featuring Investment Specialist, Tim Dowling, and over 100 financial advice professionals attending the event.
The advice opportunity
The baby boomer generation represents a tidal wave of people entering into this critical phase of financial advice every year, presenting an incredible opportunity for those continuing in the profession and willing to embrace the retirement segment.
“What’s fuelling this opportunity is the fact that 7,980 people retired in Australia just last week”, Dowling commented. “This cohort of people over the next 15 years will bring $2 trillion of assets from accumulation to decumulation. Capturing half a per cent equates to $275 million of new client assets every single year.”
Dowling went on to call out a light at the end of the tunnel for advisers, and in turn their retiree clients, after a difficult time navigating change post-Royal Commission.
“I think leaving the Royal commission behind us, having adopted the learnings and adhering and adjusting to the demanding compliance regime, it’s good to remember that advice is a critical component in people’s lives. People are happier and ultimately healthier when they do receive financial advice. For advisers, the opportunity has never been brighter”, he stated.
Triple threat to retirement portfolios
While the retirement opportunity and the people in need of advice was made clear, in unpacking current market conditions, the webinar identified a series of risks that have the potential to significantly impact the way advisers build portfolios, in addition to affecting the livelihood of current and future retirees.
When asked in an online poll what asset class is causing the most significant concern in building retirement portfolios, over half of the advisers responded fixed income (51.1%); followed by cash, 27.7%; and equities, 21.3%.
Dowling responded: “There are significant risks in each one of them for retiring clients. But there is also a place for them all, as long as you are adequately safeguarding against inherent retirement risks”.
Dowling suggested that cash holdings and term deposits offer important features in retirement portfolios in providing certainty of return and protection. Yet, in this environment they are no longer the retirement portfolio’ first resort’ and are the first ‘triple threat’.
“Threat one is the fact that cash is no longer king. Since the 2008 high of 8.25%, we’ve now fallen by 97%, down to only 25 basis points. Cash is going backwards, in real terms – it’s locking in a negative return” .
In introducing a second threat, the low yield environment was cited as forcing investors to look for more attractive yield up the risk curve.
“Portfolios need to take on greater and greater levels of private assets and in turn greater levels of risk. This is a problem for advisers because we know that their retiree clients struggle to take on more risk”.
‘Fear of heights’ or coping with an equity market correction was called out as the third threat to retirement portfolios. Despite delivering attractive long-term equity market returns, many retirees cannot risk excessive equity exposure nor be left vulnerable to technical risks such as longevity or sequencing risk.
Dowling adds: “For equity markets, we’ve reached dizzying heights and stretched valuations. The forward PE multiple of the ASX 200 was 17.9x at the end of September. Even a small correction at these valuations can cause significant losses in portfolios. And for a retiree client, any sort of loss can have a significant long-term impact on their ability to fund their desired lifestyle.”
Enhancing retirement outcomes
Dowling urged advisers to tackle these ‘triple threat’ investment challenges head-on with retirement-specific solutions in navigating portfolio construction to positively impact the journey and the retirement outcome.
He suggested that advisers look to retirement products that can generate higher returns with the added benefit of downside protection. These products would be issued from the safety and security of life company, guaranteeing a range of outcomes.
“It’s critical that clients have exposure to growth assets in this environment but in a safeguarded way. They also need to be able to deliver value to their clients in four critical ways. Through protection, growth, access to capital and flexibility in a product, such as Allianz Retire+ Future Safe” he said.