Senior Investors & Suitability Panel Discussion

By Dan Hallett, CFA, CFP on October 17th, 2013

This week, I attended the MFDA’s Seniors Summit conference to participate in a panel discussion.  We tackled several questions pertaining to senior investors and suitability.  My esteemed co-panelist Tom Bradley didn’t disappoint and shared many terrific insights.  While the audience was strictly limited to MFDA supervisory staff, I thought both advisors and investors might be interested in some of what was discussed.  Below is a summary of my contribution to the panel discussion.

What are the challenges of managing seniors’ portfolios?

Generally speaking, the more money people have to invest the more sensitive they are to short-term losses.  Losing 10% of $100,000 is nothing to sneeze at but feels very different than losing 10% of $1 million.  Accordingly, investors with larger portfolios – which tend to be older – are less willing to embrace investment risk.

Similarly, older investors are more risk-averse because they have less time to ride out bear markets and wait for stocks to recover.  And with still-low interest rates, even seemingly-modest return targets require clients to take more risk than they might otherwise be inclined to take.  I addressed this in a December 2012 blog post.

Another issue mentioned was that there are many elderly men who are in charge of the family investment decisions who may be worried about making sure family investments are well cared for post-death.  In the October 2011 issue of Investment Executive, I wrote about how this presents an opportunity for savvy advisors.

What questions should be asked when assessing new products promoted as strong performers in low or rising interest rate environments?

To this question I replied with a few simple rules.

  1. Risk-free investments will offer returns more or less equal to Treasury Bills or GICs.
  2. If an investment offers a materially higher return potential than the above guaranteed investments, the investment involves materially higher risk exposure.  I addressed this in two blog posts – one on private REITs and another on things to remember in this low-rate environment.
  3. Hedging one risk often introduces a new risk or heightens exposure to existing risks.  To the latter point I recently wrote about how the industry is understating the risks of floating rate income funds – a quickly growing class of funds.
  4. Take a ‘guilty-until-proven-innocent’ approach to assessing new products.  The good stuff will be put in your face.  It’s more work to uncover risks and other negative aspects.

Do advisors have sufficient training to counsel clients in the withdrawal stage of the investing life cycle?  What information do they need from clients?

Given that the body of research on withdrawal strategies is only about 20 years old, it’s fair to say that all advisors need more training in this area.  The process advisors use to gather information from clients doesn’t change and should cover, among other things, the client’s:

  • required spendable cash (with frequency) over time;
  • existing and expected sources of (non-investment) cash flow;
  • extent of inflation protection required;
  • tolerance for risk (through discussion and profiling tool);

Most guaranteed-income products offer no inflation protection.  The guaranteed minimum withdrawal benefit products – and other similar offerings – may hedge longevity risk but leave clients exposed to inflation risk.  To the extent that a client needs inflation protection, the recommendation of a GMWB or similar product could raise suitability questions.

Also relevant here are two other recent Investment Executive articles.  In the July 2013 issue, I warned advisors to stop using the 4% sustainable withdrawal rule developed nearly 20 years ago.  I estimate that balanced portfolios might deliver 5% to 6% annually before fees, which isn’t enough to support a 4% withdrawal rate net of typical retail fees.

And in last month’s issue, I urged advisors to develop a framework to test whether their recommended portfolios can possibly achieve the level of returns needed by their clients.  [Note also that subsequently, in the mid-November issue of Investment Executive, I wrote about two research papers focused on withdrawal strategies.]

What is your view on leveraging strategies [i.e. borrowing to invest] for investors who are 60+ years of age?

Any recommended strategy or product should meet a goals-based test by demonstrating how it’s expected to move the client closer to achieving stated goals and objectives.  I have almost never seen a leveraging strategy that meets this test.  An exception is borrowing a relatively smaller amount (not most of your home’s equity) to invest during bear markets to boost total returns over time.

I ended the discussion by basically paraphrasing another Investment Executive article.  In March 2013 I wrote that the industry should put a stop to all strategies involving:  borrowing money to invest in funds paying generous monthly cash distributions – made up mostly of return of capital – and spending or using that distribution to pay down the loan.


The panel prior to ours dealt in part with fraud prevention and included two short commercials that the BC Securities Commission has been airing on television.  They’re well done so please check out both the Investment Seminar and Coffee Shop commercials.