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Building the right portfolio

Balance and diversification are important for most investors, but the first step is talking to clients about their retirement aspirations


Date: January 19, 2016

Building the right portfolio is like cooking a good meal; while everyone has different tastes, it works out best if you use the right ingredients, mix them well and try to follow a recipe.

That’s why there are common ingredients that advisors usually suggest to their clients, says Michael Banham, vice-president, wealth distribution for Sun Life Financial in Waterloo, Ont.

“Diversification and balance are important for most investors, especially those who don’t want too much volatility in their portfolios,” he says.

The range of what goes into the mix can be wide though, he adds. A diverse portfolio can include different types of investment assets, holdings from different international markets and different industries, and a mix of management and investment styles.

“Increasingly, we’re seeing more investors use managed solutions to support diversification, but remember that not all are created equal.” Advisors can show clients who is managing the underlying asset classes, and how they’re doing it, points out Mr. Banham. That can help clients understand the real value they can get from a particular managed solution.

The first steps to building the right portfolio is to talk to the client, and more importantly, to listen to what they have to say, he says. Questions at this stage are more about their aspirations and time horizon, rather than their investment style or risk tolerance.

“Ask them what their personal hopes and dreams are,” says Mr. Banham. “Ask them: What does retirement mean to you? When you plan to retire and how long do you believe you’ll need your money to last? What are your biggest financial and emotional worries in retirement? What’s your ideal vacation? Do you plan to make any major purchases? Escape cold winters? Do you want to retire early or work during retirement?”

Advisors can follow up by asking clients what kind of risk they think they would tolerate and whether guarantees are important. They can also confirm their sources of retirement income: pension plans, registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), unregistered funds and the like.

“Based on all these factors, advisors can show clients where they are now, in terms of their assets versus liabilities, their retirement vision and any gaps that may challenge them in realizing their financial needs and expectations,” he says.

“Typically, younger clients can afford riskier investments that may provide more growth over the long term, such as mutual funds in higher-risk categories. As clients approach retirement, they can re-balance to include more diverse investments like segregated fund products, also called guaranteed investment fund products (GIFs), and accumulation annuities, sometimes referred to as insurance GICs.”

Just before or at retirement, it can be wise to allocate some retirement savings to a life annuity providing lifetime guaranteed income, Mr. Banham advises, suggesting that 25 per cent of total retirement savings is a good starting point.

“If a client can depend on a defined benefit pension plan and/or other pension plan retirement income, he or she may not need to allocate as much into a life annuity,” he says. “Conversely, having no pension plan retirement income would mean more money allocated to a life annuity, particularly as you get older in retirement, to cover basic needs and expenses.”

A client’s family situation can make a big difference too. Factors such as saving for children’s education, paying down the mortgage, taking care of aging parents and simply paying the bills will affect how much clients can save for retirement.

“Projecting how much retirement income they’ll receive, based on their current assets and savings, can provide a reality check,” says Mr. Banham. It can show clients the gap between their current saving patterns and their retirement visions.

Advisors should be ready and eager to answer clients’ questions too. Clients will have questions about their prospective advisor’s experience in retirement planning and what planning tools they have to offer.

Winnipeg financial consultant and author Sandra Foster says clients will want to know what kind of advice they can expect to receive from their advisor. Clients look to advisors to suggest an appropriate investment mix based on changes in markets, the economy and the clients’ personal circumstances, she says.

Tools that an advisor can provide to help clients build the right portfolio include calculators showing retirees’ expenses, charts showing the potential (and potential downsides) of different investments and material that can illustrate registered retirement income fund (RRIF) payouts.

“This is going to be a long-term relationship if the fit between client and advisor is good,” says Ms. Foster, author of a forthcoming book, You Can’t Take It with You. She notes that clients will want to know how the advisor gets paid, how often the advisor reports on the portfolio and importantly, how much it’s all going to cost.

Advisors can also share articles and reports about retirement that might help clients focus their retirement planning expectations, suggests Mr. Banham.

“For example, Sun Life Financial’s report on the 2015 Canadian Unretirement Index gives insights into Canadians’ perceptions about retirement.”

Knowing how other Canadians feel about retirement can help clients come up with ideas about what’s right for their portfolios, he says. Engaging the support of an advisor can help them prepare for and manage this critical time in their life.

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