Page 38 - Investment Advisor - November 2023

reTIremeNT PLANNING

needing less savings to successfully retire, there is a downside component to grap- of solutions can do to move the efficient
or to enjoy a higher standard of living ple with, but this in turn means you can frontier for the whole portfolio.”
from a given asset base,” Wade posits. get more of the upside over time.” Put another way, when one adds these
Speaking with ThinkAdvisor about his types of structured annuity segments
latest project, Pfau emphasized that this dUAL steP UP APProACH that change the distribution of returns,
research is focused on asset accumulation According to Pfau, another emerging an investor can dramatically improve
during the run-up to retirement. Often, investing approach that was “really portfolio performance while also achiev-
when people hear the word “annuity,” intriguing” and that contributed sig- ing higher risk-adjusted returns.
he explained, they tend to think more or nificantly to the positive performance “We found strong evidence that you
less exclusively about retirement income. seen in the analysis is called the “dual can build portfolios with a higher return
“It’s exciting because this research step up,” which is a feature of some expectation and less volatility relative to
project with Equitable is actually broken structured products already available in what you can achieve with stocks and
into two phases, and this first phase is the marketplace. bonds alone,” Pfau says.
not specifically talking about retirement “The basic idea here is that you are
income,” Pfau notes. “That will be the going to get credited with a fixed return Bond (or stoCK) rePLACeMent?
second part of the project. This initial whenever the index achieves a certain According to Pfau, if explained clearly to
phase is about exploring the question of degree of performance,” Pfau explains. clients, this approach to investing can be
what having a structured very appealing, especially to
return on a portion of your “We found strong evidence that those pre-retirees who feel
investments can allow you you can build portfolios with a they have saved success-
to do with the overall asset fully and want to protect
allocation and your risk higher return expectation and less what they have set aside,
and performance goals.” but who are also worried
According to Pfau, advi- volatility relative to what you can about their longevity risk.
sors and their clients are achieve with stocks and bonds alone.” Using these solutions pro-
used to talking about bell vides meaningful downside
curve distributions of —Wade Pfau protection without sacrific-
stocks and bonds, and about ing too much upside.
setting limits on both the upside and the “So, for example, consider a 15% segment “In addition, there is another really
downside. Generally, advisors seek to buffer. As long as the market was not interesting dynamic in our findings,”
limit the downside while the client is down more than negative 15% — even if Pfau says. “I often talk about annuities
approaching retirement, at the expense it was down 14% or up 50% — that inves- as a bond replacement, and certainly you
of potential upside performance. tor will be credited with an 8.5% return see that, compared to bonds, these types
“Well, we are asking, what if you for that year, and you’re only exposed to of structured financial products can per-
change that approach in a more funda- the loss beyond that negative 15%.” form significantly better, especially when
mental way, for example by bringing a In Pfau’s extensive Monte Carlo you layer in the tax-deferral factor.”
registered index-linked annuity into the performance simulations, a theoretical But, Pfau says, it was also interesting
picture, one that features a buffer on the near-retiree could expect to get that to see that, if one looks to more conser-
downside performance,” Pfau explains. 8.5% return in something like 92% of the vative investors, this approach can also
He gives the example of a structured years projected, and the other 8% of the be really appealing.
solution with a 10% downside buffer, time they see only a small loss. Naturally, “I don’t want to say these annuities
which can be achieved by purchasing this is an attractive performance distri- are good stock replacements for the
a RILA. bution for a near-retiree worried about typical investor, but they can play an
“So, if you are holding this solution market shocks. interesting role if someone was only
and you see a market drop of 8% in that “The big conclusion we can draw going to have a really low stock alloca-
year, you’ll get a 0% return, and if you here is that you can basically treat this tion anyway,” Pfau said. “By allocating
see the market fall 12%, you’ll only suf- structured, buffered approach as an to bonds in the structured product, they
fer a 2% drop,” Pfau said. “That’s the asset class in an asset allocation model,” can still dramatically improve the fron-
original idea of what a RILA is. It has Pfau emphasizes. “That’s the punchline tier of potential returns compared with,
the indexing component, which means of the research, seeing what these types in this case, a small stock allocation.”

36 Investment AdvIsor November 2023 | ThinkAdvisor.com