Though our role of planner and/or wealth manager is vital to our clients' financial well-being, great advisors also recognize their role as confidante, manager and motivator.
Asset levels aside, boomers are fearful and uneasy; portfolio values have dropped significantly yet financial obligations must still be met. At the same time, clients do not want to compromise their goals and objectives. Even the most sophisticated investors are feeling the pain -- Warren Buffet had a decline to his net worth of more than 40 percent.
I have yet to come across an investor, however, who does not believe that the market willrebound as it always has in the past. If you poll your clients, you'll find the same. This gives you the opening to present solid advice and solutions and to motivate your clients to take appropriate actions rather than to sit it out on the bench waiting for the turnaround.
If you liken the current market "discounts" to a half-off sale at your local retailer, would it make sense to skip the sale, wait for a busier season and purchase the same merchandise at 30 percent off? Maybe we'll see further drops, but there are in fact great deals now, and our clients should be taking advantage.
The key is to be proactive. In order to successfully manage client portfolios and mitigate potential losses to income we must learn to control what can be controlled, stay on top of industry changes and look to solutions that offer downside protection for our clients.
What I generally advocate for individuals who have completed the wealth accumulation phase and entered the wealth distribution phase, is the use of risk transfer strategies rather than traditional risk management strategies. The fundamental difference between the two is that risk transfer generally involves transferring the market risk to a third party, either an insurance company or the government, by utilizing products that provide some type of guarantee. Making use of these tools allows us to put a base under the riskier asset classes within a client's portfolio, allowing participation in the market while shielding individuals from risks that have the potential to result in large percentage losses.
Here's what I recommend:
- Variable annuity income benefit guarantees. Even with the changes occurring in the VA space, used as one component of the overall investment management strategy, these riders offer a layer of protection, for a fee, that allow for a more aggressive exposure to equities that might not be attractive otherwise.
- Index CDs. These products are FDIC insured and protect against loss of principal while allowing an investor to participate in the equity markets at a 70 percent to 80 percent participation rate instead of a traditional annual percentage yield payout.
- Structured Notes. This is a similar vehicle to the index CD, but usually offers a higher participation level. The risk, however, is that these notes are not backed by the FDIC and rely on the credit quality of the issuing company.
We are our clients' financial GPS system; and the current market conditions, a closed off-ramp on the highway. It is our obligation to be the experts in regard to the product options in our respective areas of focus so that we can easily redirect our clients to the road that brings them to the desired ending location.
The same goes for your practice. Look at where you are now versus where you desire to be and make the appropriate adjustments.
Congratulations to this year's Boomer Market Advisor(s) of the Year as well as to the many great advisors that touch their clients' lives and help them navigate these difficult times.
Mark A. Cortazzo, CFP is senior partner with MACRO Consulting Group in Parsippany, N.J.
