Speaking during a recent press event in New York City, David Blanchett, managing director and head of retirement research at PGIM DC Solutions, did not shy away from an uncomfortable truth about this moment in the U.S. and global markets.
Pointing to a chart that shows substantial year-to-date losses in practically all asset classes across both equities and bonds, Blanchett said the markets are a "hot mess" right now, with little hope for an immediate recovery.
"It is difficult to put into words just how awful this year has been so far," Blanchett said. "Equities are way down. Balanced portfolios are down. Bonds portfolios are down. Bitcoin is down, too, bless its heart. There has not been anywhere to hide."
Blanchett was joined at the event by David Lau, founder and CEO of DPL Financial Partners, and Shannon Stone, lead wealth advisor at Griffin Black Inc. The trio spoke in depth about how the market challenges are straining both advisors and their clients — especially the fact that both bonds and stocks have lost significant value this year. They also addressed the growing opportunity set facing advisors and their clients when it comes to utilizing annuities as a safe and efficient means of securing retirement income.
Diversification Falls Short
According to Stone, Blanchett and Lau, the significant degree of correlation seen in the current market across disparate equity and fixed income asset classes is raising all sorts of difficult questions for advisors and their clients.
"We have become accustomed to speaking about diversification as the main means of risk management in investors' portfolios, but this moment in the markets is showing us that diversification, at least in this specific environment, is not enough," Lau said. "Investors who are nearing retirement or living in retirement need better risk management support."
Due to the fact that interest rates had remained so low for so long heading into this year, investors have been carrying excess equity risk into and through retirement. According to the trio, investors have thus suffered significant losses so far in 2022, including many people in the "retirement red zone" that extends some 10 years around the date of retirement.
"We are in a moment when sequence of returns risk is worse than it has ever been for today's near-retirees and retirees," Blanchett said. "Equities have become a primary component of the retirement income plan for most retirees, and we can see right now why that is a serious problem. Equities are not designed to be income vehicles, especially when you have to sell them during a market dive."
A Need for Income Planning
Echoing Blanchett's sentiments, Stone said the experience of the past nine months shows in no uncertain terms that retirement income planning efforts must be stepped up. In her case, Stone likes to speak with clients well in advance of their retirement date about building a "personal pension." Her approach includes both market-based and guaranteed income components that leverage annuities.
"Fiduciary, fee-based advisors have such an important opportunity to step up their income planning game," Stone said.
According to the panel, the proliferation of non-commission-based annuity products has been liberating and exciting for the financial advisor industry. In fact, in the group's experience, advisors must work harder to update their understanding of what is available in the annuity marketplace today — because things have changed so dramatically.
