For many, approaching retirement is often characterised by heightened emotion and anxiety associated with competing life goals and financial objectives. Each of these will typically have different time horizons and be prioritised in different ways. Most retirement portfolio construction approaches rely solely on risk profiling as the primary mechanism to determine the ‘optimal’ retirement portfolio. While useful, such tools are unlikely to capture all that is important to retirees who typically have multiple investment objectives. Additionally, many investment decisions are product driven, rather than strategy driven. Lonsec believes the focus should be on investment strategy, with product selection simply being a vehicle to execute a strategy, rather than the driver of the strategy.
Lonsec believes that an objectives-based approach can enhance and complement existing approaches to retirement portfolio construction in the following areas:
- Expectations management: better communicate and manage client investment expectations, including the level of risk required to achieve those objectives
- Alignment of strategy & objectives: Strategies are specifically tailored to individual client objectives, recognising that each client will have different retirement objectives and prioritise those objectives differently
- Alignment of product to strategy: product selection is a result of the investment strategy; it does not drive the strategy. Lonsec believes that this is particularly relevant given ASIC’s focus on product selection driven by clients’ ‘best interests’
- Engagement: improves financial adviser-client engagement by focusing discussion on investment strategy and how it relates to client investment objectives, rather than focusing on returns, markets and products.
This paper provides a practical framework to assist financial advisers in constructing an objectives-based retirement portfolio. It is designed to follow the key steps of the advice process and is broken into the following sections:
This paper can be used to assist financial advisers in constructing objectives-based portfolios for retiree clients, or as support material to the Lonsec Lifestyle Retirement Portfolios.