save-the-date

Watching the news, it's easy to feel a sense of unease about the global economy.

"The public is getting a 24/7 diet of commentary," says Rod Tyler of Tyler & Associates in Regina. In contrast to the negative hype, he points out "corporations in North America are healthier today than they've ever been. They have more cash on their balance sheets, and profitability is excellent."

The problem is, people are prone to responding to hype. News of a down economy can prompt a client to voice a desire to push back retirement five or more years later than originally planned.

Then, when markets recover, that same client will shove his retirement age back to the original projection—or even shave off a couple of years.

Obeying these fleeting demands, as significant as they're portrayed at the time, is simply not practical. Nor is it a good idea for the client's portfolio.

One solution that's worked well for Winnipeg-based David Christianson is to let clients be less specific about their retirement dates. The senior advisor at National Bank Financial (formerly Wellington West Total Wealth Management) will show clients their income picture at age 63, say, and measure progress year-over-year to update the projection as they get older. "Then, when they get to be 63 and want to work another two-to-four years, we change the date and show them the effect of [working longer]."

A lot of his clients in their 60s have been going with a flexible date for years. "I'd say 20% of that has to do with the markets," Christianson says. "The rest is we've helped them achieve a balanced lifestyle, and they're making enough that they don't have to draw on their investments—and they're travelling four months of the year."

Numbers over emotions?

Sterling Rempel, a certified financial planner at Future Values Estate and Financial Planning in Calgary, says when emotions take over, it's important to bring the client back to the numbers. "This is where a planner's role as a manager of human behaviour comes in. Knee-jerk reactions to headlines tend to be wrong."

Rempel shows clients the pattern markets will likely follow and points out they historically always bounce back.

Being proactive also goes a long way to keeping things under control, says Christianson. Updating the client's projections annually both prior to and during retirement reveals whether they're ahead of, or behind, the prior year.

Short-term fluctuations are inevitable, but if you've tracked it year by year, you can show them how the portfolio recovered from prior downturns. That data lets the advisor immediately put prevailing economic events into context.

"You tell them last year it looked like you'd have $85,000 a year forever," says Christianson. "Now, because of what's happened in the market, it's dropped to $83,000. Is that really a material change?"

A clear illustration showing the client he's only looking at a $2,000 decrease in annual income "immediately flops any flip-flop that might otherwise be occurring."

A more interesting subject

And, while clients fret over world affairs, notes Tyler, a far greater threat to their long-term economic health is the historically low level of current interest rates.

These, far more than equity activity, threaten to throw a wrench into retirement plans.

"There is no immediate prospect of interest rates going up," says Tyler. "And you have 9.4 million Canadians rushing towards retirement. The very thing they need, predictable income, is not readily available via the traditional way, which was a fixed annuity."

Rempel uses Monte Carlo simulations to stress test portfolios and assure clients. These tests take into account inflation rates, the possibility of low rates of return, and what happens if clients live longer than expected; allowing the advisor to make adjustments.

But comfort only comes if both advisor and client are on the same page. Meeting regularly helps prevent an advisor being blindsided by a client's sudden reaction to a change in the economy. And simple portfolio modifications (such as beginning to create a cash wedge in anticipation of retirement, or rebalancing stocks so that growth is more uniform) are easy ways to maintain a strong relationship—and ensure the client understands his retirement plan.

Add a comment

You must be logged in to comment.

Register on Advisor.ca