Determining a client's risk tolerance is a standard requirement in financial services, both as a matter of best practices, and regulatory minimums. In recent years, though, advisors have increasingly leaned towards doing the minimum required to assess client risk tolerance, due to the frustration that client risk tolerance itself has varied wildly through the bull and bear market cycles of recent years. However, a new study out using FinaMetrica risk tolerance data from before and after the global financial crisis joins a growing body of research suggesting that in reality, client risk tolerance is actually remarkably stable, and that what's changing through market cycles is not the client's risk tolerance, but instead risk perceptions. The significant implications of the research are that planners struggling with unstable client investment behaviors around risk - e.g., buying more in bull markets and selling out in market declines - may actually need to focus more on managing risk perceptions, rather than blaming the instability of client risk tolerance.Read More...
As interest rates remain low, investors - especially retirees - struggle to find yield wherever they can. Unfortunately, though, the necessity of earning a required return to fund financial goals becomes the mother of invention for a wide range of investment strategies, both legitimate and fraudulent.
A recent offering of rising popularity is investing into structured settlement annuity contracts, which often claim to offer "no risk" rates of return in the 4% to 7% range. In general, the opportunity for "high yield" (at least relative to today's interest rates) and "no risk" is a red flag warning. But the reality is that with structured settlement annuity investing, the higher returns can legitimately be lower risk; the appealing return relative to other low-risk fixed income investments is not due to increased risk, but instead due to very poor liquidity. Which means such investment offerings can potentially be a way to generate higher returns, not through a risk premium, but a liquidity premium.
The caveat to structured settlement annuities, however, is that the investments can be so illiquid and the cash flows so irregular, they probably should at best only ever be considered for a very small portion of a client's portfolio anyway!
Over the past decade, an increasing number of financial planner baby boomers have reached the point that they would like to retire out of their practices; as a result, the 2000s saw a dramatic increase in the focus on succession planning, including how to prepare a financial planning firm for sale and steps to make the business more saleable and valuable.
Yet the reality is that once a financial planning firm is saleable and able to function effectively without the daily involvement of the founding principal, it's simply an investment holding like any other one; except it has an incredible cash dividend yield on top of significant appreciation potential.
Consequently, as the process of transitioning firms to saleability continues, a new challenge is beginning to emerge: planners who are successful in making their planning firm saleable and valuable are suddenly finding that once that point is reached, they no longer necessarily want to sell (all of) their business after all, which would force them to reinvest the proceeds into lower-return investments that could diminish their own retirement!
Clients who need to improve their prospects for retirement generally have three options: spend less, save more, or retire later. Technically, there is a 4th option - grow faster - but it is typically dismissed due to the risk involved in investing for a higher return. In practice, clients rarely seem to dial up the portfolio risk trying to bridge a financial shortfall in retirement, and taking out a margin loan just to leverage the portfolio to achieve retirement success would most assuredly be deemed imprudent and excessively risky. Yet at the same time, a common recommendation for accumulators trying to bridge the gap is to keep any existing mortgages in place as long as possible, directing available cash flow to the investment portfolio, and giving the client the opportunity to earn the "risk arbitrage" return between the growth on investments and the cost of mortgage interest. There's just one problem: from the perspective of the client's balance sheet, buying stocks on margin and buying stocks "on mortgage" represent the same risk and the same leverage, even though our advice differs. Are we giving advice that contradicts ourselves?
Market volatility is a stressful time, not only for clients, but often for planners as well. Not only does client activity rise, with more phone calls, meetings, and some hand holding, but at the same time revenues come under pressure, as new (and sometimes existing) clients often become less willing to implement, and firms with revenue is tied to the markets can actually see an outright decline in income. But the latter part, at least, is not something you have to just accept; there are ways to hedge the revenue and profit risk in your practice, and so far, those strategies are doing exactly what they're supposed to!Read More...
In theory, it seems like such a great idea. The greatest fear of a retiree is living longer than expected and/or outliving his/her money. Only slightly less worrisome is the similar risk that the retiree lives so long that inflation erodes wealth and income to the point that the retiree can't maintain his/her standard of living. Yet there is a single financial services product that tackles these two fears head-on, with rock-solid guarantees (at least as long as you buy from a strong company): the inflation-adjusted immediate annuity. Or for those who are a little older with a shorter time horizon (where inflation is less of an issue), the even-more-widely-available traditional immediate annuity. But despite the apparent "perfection" of the solution to address the problem, immediate annuities are just a tiny fraction of overall annuity sales, and most clients are completely unwilling to put any money into them. So what's the deal? If immediate annuities are such a great solution, why doesn't anyone want to buy one?
We often find great value and pride in owning things - yet the reality is that in many situations, we actually don't get a lot of use out of much of what we own. Which starts to beg the question - maybe we should spend more time renting stuff we want to use (loanership) when we want to use it, rather than buying it (ownership).
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The pitch goes something like this: "You are eligible for more insurance than you currently have, giving you "excess capacity" for insurance on your life. Why don't you sell that capacity, since you're not using it anyway, and put the extra money in your pocket to meet your own goals?" And if it wasn't against public policy, the strategy might even work!Read More...
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