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February 2021, BOSTON—Heightened periods of market volatility may increase demand for advice that emphasizes derisking and an ongoing income stream that preserves gains from the most recent bull market, according to the latest Cerulli Edge—U.S. Asset and Wealth Management Edition.
When combined with dividends from stocks and bonds, close to half of affluent retirees’ income comes from sources heavily influenced by market fluctuation. While this should have meant healthy accounts after 12 years of historic bull markets, the subsequent downturn in 1Q 2020 due to COVID-19 placed emphasis on diversity of income streams, especially options such as Social Security that are less reactive to markets. Although U.S. equity markets have largely recovered from the 1Q 2020 sell-off, providers should continue to emphasize drawing income from multiple avenues and renew emphasis on derisking portfolios to preserve hard-fought gains from losses that are not easy for a pre-retiree to recover in the short term.
On top of market fluctuations, the low interest rate environment that the Federal Reserve has committed to presents additional challenges for retirement income. Low interest rates make traditional retirement income sources, such as bond ladders and certificates of deposit, pivot to take on new roles, such as risk mitigation, in retirement portfolios. “Going forward, fixed-income managers will need to emphasize how their processes are critical to achieving portfolio stability, while also earning risk-adjusted returns that can outperform the market,” says Scott Smith, director of advice relationships. “Stable products with minimal, or even inverse, correlation to the markets could act as circuit breakers that can protect the gains investors made during the past 12 years, particularly among near-retirees newly concerned about financial security,” he adds.
As clients approach retirement, flexibility is a major focus. The ability to withdraw funds if needed and the ability to update their underlying portfolios are critical. Close to two-thirds (63%) of surveyed households report that withdrawal flexibility is their most desired retirement income feature. According to Smith, “This desire is understandable given the many uncertainties surrounding personal health, job stability, and other factors that retail investors often face.”
Given past Cerulli research showing that times of high market volatility are when investors seek advice the most, providers should be prepared to discuss income-producing strategies with their mass-affluent retirees and near-retirees as a way of derisking portfolios and ensuring a comfortable retirement. “Advisors should be both empathetic and cognizant of potential shifts in the individual retirement account market for their clients, making the right rollover decisions while also keeping clients focused on the bigger picture regarding their financial goals, helping them stay as on track as possible in these turbulent times,” Smith concludes.
NOTES TO EDITORS:
These findings and more are from The Cerulli Edge—U.S. Asset and Wealth Management Edition, February 2021 Issue.
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