Last week’s top conversations were started by thought leaders Wade Pfau, Scott MacKillop and Joe Tomlinson. They generated thoughtful discussions on: Dimensional Fund Advisors’ target-date retirement income funds; whether risk tolerance can be measured by questionnaires; and the impact of investment market performance on retirement planning.
Wade Pfau’s Meeting Retirement Goals with Dimensional’s Target-Date Retirement Income Funds received six comments from thought leaders applauding Pfau’s analysis of why a stable account balance does not necessarily translate into sustainable income. Members agreed with Pfau’s conviction that risks related to inflation and interest rate fluctuations should be considered when constructing a retirement plan, but cited concerns about the costs of the DFA Target-Date Retirement Income Funds he discussed in his analysis. Some claimed that these funds are “one-size-fits-all, i.e., treating everyone with the same retirement date the same,” and that they are most appropriate investors that do not have advisors. They posited that advisors can avoid the fees of these funds by using TIPS ladders to protect against inflation and interest rate risks, and they suggested that advisors would benefit from using SPIAs as well to provide longevity protection.
Scott MacKillop’s Are Risk Tolerance Questionnaires a Silly Waste of Time? tallied 68 comments as it marched into its fourth week of activity. This week, Paul Resnik, the co-founder and director of “the risk tolerance experts” FinaMetrica, joined the conversation to share insights about the difficult but essential task of assessing client risk tolerance. While advisors recognized the shortcomings of risk tolerance questionnaires, they cited the benefits of using them to fulfill their fiduciary duty. To that end, many advisors spoke highly of FinaMetrica’s psychometric risk tolerance tests. In response, Resnik explained that FinaMetrica’s tests are unique in that they “don’t ask direct questions that people can’t answer – instead, they are designed to capture personality traits of which the person may not be aware or not be able to describe.” Resnik agreed with members who contended that risk tolerance is an important ‘talking point’ with clients, and explained that FinaMetrica’s tests provide information that advisors can use during client meetings to better assess risk attitudes. However, some advisors questioned the relevance of FinaMetrica’s risk scores, arguing that during a past bear market they did not accurately characterize the risk tolerance of “alpha males.” Resnik clarified that FinaMetrica’s risk scores are merely a guide, and that they are best used in conjunction with an experienced advisor’s judgment.
Joe Tomlinson’s Retirement Planning and the Impact of Investment Market Performance received 10 comments from advisors commending Tomlinson for his analysis of retirement withdrawal strategies under stressful investment conditions. Members widely agreed with Tomlinson’s recommendation to allocate a percentage of retirement portfolio assets to SPIAs to ensure clients never run out of distributions. While advisors acknowledged that some avoid annuitizing to keep all options open for clients, they concluded that SPIAs are an effective tool for ensuring basic needs in an uncertain world. Advisors also discussed the difficulties associated with protecting client portfolios from market risk during the early retirement years. Some suggested that using variable withdrawals can be a resilient and useful strategy for new retirees, but they acknowledged that it does lead to greater volatility consumption.
Marianne Brunet is a financial markets analyst with Advisor Perspectives.
