The Advisor’s Role In Retirement Advice: Financial Advisors’ Daily Digest


We’ve been discussing various aspects of the retirement crisis recently and it is worth asking: What is the advisor’s role in all this?

That is Ron Surz’s question in his article, “RIAs and IRAs: Both Can Be Better.” No, he is not klutzily transposing letters. He is referring to Registered Investment Advisors – the primary type of advisor overseeing Individual Retirement Accounts, which are the most popular retirement savings vehicle. Ron’s main point, on which we agree, is that advisors should encourage greater savings (as opposed to relying on an assumed high rate of return) and that they should help clients steer clear of risk at the crucial “retirement risk zone” in the years just before and after separation from work.

Apparently, they are not doing so, as this interesting statistic he cites suggests. I quote:

The Employee Benefits Research Institute (EBRI) report on IRAs reveals that equity allocations are approximately 55% across all ages, a surprising reality. Target date funds (TDFs) are also exposed to excessive risk, with an average 55% allocation near the target date. This is the allocation that lost 30% in 2008, and risk has increased since. To guard against the devastation that lies ahead, IRAs and TDFs should have very low risk in the 5-10 years before and after retirement, but they don’t.”

Ron has often written about the high equity allocation of TDFs. It was therefore interesting to see that IRAs on average share the identical allocation and without any distinction as to age.

My take: I wouldn’t make a blanket statement that a 55% equity allocation is too high, but I would make a qualified statement that in most cases it probably is. The issue is not the percentage, per se, but the ability of an investor who retires on the cusp of a severe market correction to make it through a few tough years without forced selling of assets at a low price. And that depends on the size of an investor’s portfolio and expected expenditures.

Thus, Bill Gates could be 99% in equities, since the remaining 1% would be more than adequate to address his and Melinda’s needs during a market setback lasting a few years. On the other end of the spectrum, a retiree with limited savings likely can’t afford the risk of equity investing – despite his higher need for the growth that stocks can bring – and would have to manage with mostly cash. When you need every penny, you’re living in a financial straitjacket and generally lack options.

This brings me back to the question of the advisor’s role. That 55% average equity allocation is indicative of America’s risk-taking culture. A friend with high-level professional investment experience in three disparate regions of the world has pointed out that most of the world is not into U.S. levels of risk; something like a third allocation to equities is common overseas. U.S. markets have been the envy of the world, and taking risk has generally paid off (though tragically, not always for everyone).

But let’s not let cultural biases, or any other – such as brokerage firm incentives to push higher risk – influence what should be a fiduciary arrangement. That is to say, the only standard that matters is the unique needs of the individual investor. The best advisors know this and customize client portfolios based on their portfolio size and spending requirements, with a view toward mitigating the risk they won’t have the income they need when they need it.

Some advisors will respond to this with statistics – i.e., that historical stock market averages favor aggressive investing. What I’m saying here is that you have to earn the right to invest aggressively – by saving enough to weather a long crisis. That is because investing is an arena with many possible outcomes, but you will only have one of them, meaning that (as Ron often puts it) you only get to do this once.

It also bears mentioning that in the chaos of possible outcomes that investing produces, staying well diversified is your best insurance against portfolio disaster. That is why, for the average U.S. investor who has not saved sufficiently for retirement, a 55% allocation to equities at the retirement risk zone may indeed be too risky; the wealthy of course have more options. A good advisor knows this and will not play roulette (especially the Russian kind) with the client’s nest egg.

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