Will clients soon be receiving additional help to deal with risk of outliving their assets? Read on to find out what sort of new product introductions maybe coming to help individuals. This is part 1 of a 2 part article.

Introduction:

The turbulence of the equity markets over the last three years has raised the level of anxiety of retirees outliving their assets as they can no longer count on a steady 8 – 10% gain per year. As a result,  Financial Advisors and Investment Management firms are continuing to innovate to meet two important client needs during withdrawal phase:

• Improve the ability to forecast client’s cash flow needs

• Generate predictable income streams

Research:

According to a survey from Allianz Life Insurance Co., 86% of boomers who worked with a financial advisor said that ensuring the safety of a significant part of their nest egg was “very” or “extremely” important and another 85% said that ensuring guaranteed income was “very” or “extremely” important.

So what sort of help is forthcoming that advisors and client’s can look into?

• Using Liability Driven Investing (’LDI’) in Retail investment products:
  
  LDI Background: A primary benefit of an LDI strategy, which in the past only existed in institutional Defined Benefit / Pension products, is its ability to avoid large future cash flow deficits. Creating an LDI strategy has typically been accomplished for Pension Plans through a three stage process:
  1. Define a new benchmark for performance: Identify and create a sum of all future liabilities (i.e., cash flow needs). For retail investors, this may consist of expenses such as the children’s college fees, mortgage payments or known medical costs.
  2. Assess which investments best match up to the future liabilities: Once a new benchmark has been identified, an investment manager is able to structure a mix of fixed income and equity investments that account for interest rate sensitivity and targets a rate of return consistent with, or in excess of, the client’s cash flow needs.
  3. Optimize investments to outperform: Finally, investment managers will look for areas to optimize the various ‘alpha’ sources through tactics such as detailed stock selection and currency overlays.

  LDI in Retail Investment Products: To date, one of the reasons that LDI strategies have been exclusive to institutional investors is due to the level of unique customization involved in LDI to addresses the circumstances of the pension plan and pension plan sponsor. For retail investors, it has not been economical for investment managers to provide such a level of one-on-one customization.

  Now at least two firms are pursuing LDI based retail products:

  • Asset Dedication, an affiliate of BondDesk Group LLC, offers an investment strategy called the “Asset Dedication Strategy“. The premise of the strategy is to enable Financial Advisors a means in which their clients have a custom portfolio that delivers a predictable income stream that is matched to the client’s specific needs. Asset Dedication was recently highlighted in an OnWallStreet article, “Bringing Institutional Investing to the People – Liability Driven Investing – It’s not just for Institutional Investors anymore”

    

  • Bank of New York Mellon is taking the route of introducing retail mutual funds, that are best described as a “solution-based” product. Looking to generate an absolute level of return needed to meet the the cash flow needs of a client’s specific need, BNY Mellon envisions providing retail mutual funds that can match up a “solution” to a client’s need. While BNY Mellon has yet file with the Securities and Exchange Commission to launch the funds, some additional information can be found courtesy of Investment News: BNY Mellon mulling absolute-return funds for retail investors

LDI conclusion:

Whether or not an LDI retail product is appropriate for an individual investor hinges on whether or not their investment goals match up with the goals that LDI solves for:

• Investor is NOT aiming to maximize returns
• Investor is NOT aiming to outperform a specific index
• Investor MUST be able to meet cash flow liabilities
• If investor is currently running a deficit, simply AIM to outperform liabilities

Be sure check out Part 2 of this article!