In retirement, when investors switch from accumulation to decumulation, advisors have to help their clients wrestle with a number of challenges. Two of the biggest questions are when to de-risk the portfolio and by how much, according to Anna Castro, a senior portfolio manager at TD Asset Management Inc. (TDAM), who leads the Multi-Asset Portfolio Management team. Other key issues include managing the sources and timing of income, taxes, and risks such as inflation, volatility, and vulnerability to the sequence of returns. And then, of course, there are today’s historically low bond yields. Investment Executive asked Anna Castro to share her insights into what retirees need from their advisors and asset management firms.
What do advisors working with retired clients need to focus on in the current investment environment?
With such low bond yields and rising inflation, there’s a lot of concern about how to preserve capital. The traditional approach to portfolio management shifts assets toward fixed income in retirement, but there is an evolving risk of holding too much fixed income in this market. Many investors have a strong home country bias, with more than 50% of their assets held domestically, and that overconcentration can be a risk too.
I think it’s important to consider the behavioural or psychological aspect of client management. When clients look at the markets and how much money they’ve made, and listen to all the talk about inflation, they wonder how they will preserve their quality of life. At one end of the spectrum, they may end up being too conservative and saving too much cash without really investing. The other temptation may be to stretch for yield, but this could come at the worst time unless they have a holistic portfolio that manages risk. Both client mindsets can undermine a retirement plan.
In the past two years, there has been a lot of short-term thinking in the market. Alternatively, an approach that emphasizes goals and outcomes can help clients refocus on their own plan, their own risk, and their own behavioural and psychological mindset. It’s not about what your neighbour made last month or what that neighbour holds in a portfolio, because that’s not your goal. That doesn’t match the outcome you want.
What investment solutions can help advisors deliver what retired clients need?
Three major product categories can help. First, all-in-one solutions that are managed from a global, multi-asset class, multi-time horizon perspective can take care of asset allocation and investment selection so advisors can focus on identifying clients’ needs and goals and matching them to a solution with the right risk appetite. Second, absolute return solutions that incorporate traditional and non-traditional asset classes can provide growth and stability across economic cycles. Third, that are built for this low-yield environment can incorporate tactical and risk managed use of derivatives, such as options, to provide stable growth from equities with bond-like volatility.
All three of these product categories take an outcome-oriented, goals-based investing approach—something that’s been the focus of our innovation at TDAM for the past five years. We don’t map portfolios to a traditional asset allocation benchmark. We think about what outcome we want to achieve for clients and then use our deep, active tactical management capabilities to develop an optimal mix to achieve that outcome. We focus on building for the future, and we manage volatility using both traditional and non-traditional strategies.
A goals-based approach is relevant to each client because it can match that individual’s return needs and risk profile. Meanwhile, the investment manager has full flexibility to look across the globe and across various investments and think about diversification more creatively.
“An approach that emphasizes goals and outcomes can help clients refocus on their own plan, their own risk, and their own behavioural and psychological mindset.”
What sets TDAM’s retirement solutions apart from others in the marketplace?
We are the largest pension money manager in Canada,1 with the scale to access institutional-calibre solutions. We have a breadth and depth of investment and risk management professionals battle-tested through market cycles. We also have a diversity of expertise on our asset allocation and derivatives team that informs the construction of global multi-asset portfolios. This allows us to go beyond traditional asset classes—for example, incorporating both private and public alternatives. That matters a lot because mixing traditional and non-traditional asset classes improves diversification in sources of income and returns.
Also, TDAM sees itself as being first and foremost in the business of providing relevant solutions to help solve real world investment problems for people. So, while we have a lot of tools in our toolkit, and we are continuously challenging ourselves to add to those capabilities, everything we do is client purpose driven. We focus on building resilient, comprehensive and nimble solutions that evolve with the market.
How can advisors access additional support on meeting retired clients’ needs?
TDAM produces podcasts, webinars, white papers, online tools, calculators and more to support advisors with the challenges associated with retirement. Our portfolio managers regularly share their insights into the markets and how to use our portfolios with clients. We also spend a lot of time on client education so people can be at peace with their investments.
Additionally, find some insightful brochures below:
1 Investor Economics, “Managed Money Advisory Service–Canada” (Spring 2021). AUM as of December 2020. As measured by the sum of AUM across the “DB Pension Plan” and “DC Pension Plan” categories disclosed in the Investor Economics report.