Max Osbon, Osbon Capital Management, shared his article with us, “Am I Risk Tolerant?”. It highlights the changing needs of the retiree from the traditional rules of thumb of financial planning for accumulation to the more varied and complex needs of retirement planning. You can read his article here.
In his article, and his firm’s approach, we see a connection with RIIA®’s Retirement Management Analyst® (RMA®) concepts of risk capacity and Retirement Allocations℠ that provide Risk Retention/Upside Portfolio, Risk Management/Floor Portfolio, Risk Pooling/Longevity Portfolio, and Risk Avoidance/Reserves Portfolio.
Lost in translation
“I didn’t know what I was answering.”
Osbon shares a story about a woman who filled out a survey when she opened her investment account at a big investment firm. She checked a multiple choice box that said she was ok with a -15% to -20% drawdown. When the market fell by that much, as did her portfolio, she was shocked, unprepared for the swings and upset with her advisor and the firm she had trusted. Ultimately she had an unfortunate experience because her portfolio didn’t match her REAL goals. That could have been avoided. Where was the conversation?
Conversations not data entry
As Osbon notes, the scale of low-medium-high (risk tolerance) is simply inadequate. One word is not enough. Consider the following approach an RMA uses to guide a client’s retirement planning:
The Differentiating Client Questions
- Financial Planning:
- What is my asset allocation?
- What is my risk tolerance?
- Retirement Planning:
- What is my retirement income? What lifestyle can I expect in retirement?
- What is my risk capacity What risk exposures can I afford?
The Right Tool for the Job
- Financial Planning:
- What is my asset allocation?
- 60/30/10
- What is my risk tolerance?
- Aggressive, Moderate, Conservative
- Retirement Planning:
- What is my retirement income?
- Fundedness℠
- What is my risk capacity
- Household Balance Sheet View℠
- Retirement Allocations: 90/0/0/10
- Household Balance Sheet View℠
- What is my retirement income?
- What is my asset allocation?
Are you prepared to have the conversation with your clients to discover their risk capacity and implement Retirement Allocation portfolios that manage retirement risk? Can you meet the new Fiduciary Rule requirements for data gathering, providing recommendations in the client’s best interest, and demonstrating reasonable compensation? RIIA’s September 18th RMA online class through Salem State University can help you check the completeness of your Retirement Policy Statement