Complexity Checks Alternative Investment Growth

The complexity of alternative investments prevents many financial advisers from advocating their addition to client portfolios, despite the diversity and volatility advantages alternatives can confer.

So reports a new survey by Natixis Global Asset Management’s Durable Portfolio Construction Research Center, which sought to gather adviser insights on retirement savings, asset allocation strategies and the challenges posed by a rapidly aging client base.

According to the survey, called the 2013 Natixis Survey of U.S. Financial Advisors, only one in four (25%) advisers reported using alternatives such as hedge funds, private equity and commodities in client accounts on a regular basis. Among those not utilizing alternatives, 44% reported feeling alternative products are too difficult to explain to clients to warrant regular use.

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Also telling is the 74% of advisers who said they would support a requirement that sales materials for alternative strategies be “written in plain English.”

Underscoring the need for better understanding of alternatives, 69% reported they are seeking ways to replace traditional diversification and portfolio construction techniques with new approaches in order to achieve results—a significant increase from last year’s survey, in which 46% said the same. 

Looking beyond alternatives, the survey found more than half (56%) of advisers said it’s difficult to build portfolios that can simultaneously reduce risk and enhance returns. A similar number (53%) reported difficulty balancing drawdowns for retirees with the need to keep their portfolios growing.

On the participant side, less than half (47%) of advisers believe their clients know how much they need to save for an effective retirement.

Researchers called that a positive indicator, considering the 28% observed in 2012, but also warned that future retirees are generally underestimating the threat of uncovered or unexpected healthcare costs that can arise later in life.   

Another challenge identified by advisers in the survey is that an aging client base is taking away from time to prospect new business. In fact, advisers reported spending twice as much time on routine client service tasks as they do on developing new business—with 77% of existing clients now age 46 or older and 35% over age 67.

More on the survey’s findings and methodology available here.

Social Security Retirement Age Not What You Think

The effective retirement age for Social Security is now 70, according to a new research brief from the Center for Retirement Research at Boston College.

“Social Security’s Real Retirement Age Is 70” by Alicia H. Munnell says this age change is the result of increases in Social Security’s Delayed Retirement Credit, with monthly benefits reduced for earlier claiming. According to Munnell, “That credit, which was modest at first, now fully compensates for delayed claiming. As a result, lifetime benefits are roughly equal for any claiming age between 62 and 70, and the highest monthly benefits are available at 70. So in that regard, 70 has become the new 65.”

She added, “The level of monthly benefits at 70 appears appropriate given the increased deductions for Medicare premiums, the greater taxation of benefits, the declining importance of the spouses’ benefit, and the diminished sources of other retirement income. The brief aims to clarify Social Security’s current benefit structure.”

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In the brief, Munnell examines: how 70 became Social Security’s new retirement age; whether 70 is the “right” age by looking at “equivalency” to 65, the increasing dispersion in life expectancy by socioeconomic status, and actual retirement patterns; Social Security replacement rates that workers will face at different retirement ages; how with the maturation of the Delayed Retirement Credit, the “Full Retirement Age” no longer describes the benefit structure, and how further increases in this benchmark simply reduce replacement rates for everyone.

The brief also suggests:

  • Benefit levels at age 70 appear appropriate given that rising deductions for Medicare and greater benefit taxation have reduced Social Security’s net replacement rates;
  • The shift to age 70 should be feasible for many workers given increases in lifespans, health and education;
  • Vulnerable workers forced to claim early will have low benefits and will be particularly harmed by any further cuts; and
  • Policymakers need to inform those who can work that 70 is the new retirement age and devise ways to protect those who cannot work.

Munnell concludes, “People are living much longer, so keeping monthly [Social Security] benefit levels unchanged results in ever increasing costs. But constantly reducing benefit levels by increasing the Full Retirement Age is very hard on those who cannot change their retirement date. If we want to cut benefits, it makes much more sense to directly change the benefit formula.”

The full brief can be downloaded here.

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