Evan Riddell of Richardson Wealth explains why structured products aren’t core to his approach, but outlines the cases where they can be used effectively
Each month at Wealth Professional we focus on a topic we believe to be especially relevant to advisors now. This June we're focusing on structured products.
When it comes to managing clients’ retirement plans, there’s a lot that financial advisors may want to take from the pension space. Pension plans are managing many of the same core areas of risk: namely the risk that an individual may outlive their savings. They do so with diversification, with discipline, with a long-term strategic view, and with a focus on sustainable income. Those are principles that most retail financial advisors seek to apply in their clients’ individual retirement plans, just as pension funds apply them to group plans. The structured product market offers something of a direct overlap between retail and pension management. These products trade upside potential and liquidity for a defined outcome and capped downside. They promise pension-style risk management in a package that retail advisors can use for clients.
Evan Riddell doesn’t use structured products as a core allocation for his clients. The Wealth Advisor, Investment Advisor, Associate Portfolio Manager and founder of Riddell Wealth Management of Richardson Wealth specializes in serving a client base of high net worth retirees. While he says that some of the most important risks to control for involve longevity and behavioural mistakes in multi-decade retirements, he explains that the liquidity drawbacks can make these products more challenging. Nevertheless, he applies them in certain circumstances where behaviour is the most important thing to control.
“We’ve used [structured products] selectively in certain client situations over the years. And again, it was very situational around either potential for protecting against behavioural issues that the client had self identified as saying, ‘I’m going to panic out and I can’t take the risk, but I need my money to grow more than what interest in my bank account is going to provide,’” Riddell says. We needed to find an alternative that’s going to allow them to participate in some upside but have that cap on the downside to make sure that they’re not going to panic out when they’re 70 or 80, when they can’t really have the time to recover.”
The problems Riddell tries to solve
Clients don’t come to Riddell asking for a product. They want him to answer that core question that every client has: am I going to be okay. Riddell’s clients want to know that they can spend with confidence. They want to travel, spend time with their family, and focus on a life beyond money. Riddell’s job is to provide that confidence by controlling for risks.
Riddell’s view is that the primary risk clients face in retirement isn’t on the markets themselves. The risks come when spending in the early years of retirement quickly outpaces what was planned for. The risks come when market volatility spooks clients and causes them to panic and exit the market. The risks come when the portfolio isn’t optimized for flexibility, knowing that individual circumstances can change rapidly.
The risks come from Canada’s rapidly aging population, and the fact that life expectancy for Canadians over 65 is now over 85, according to Statistics Canada. When a client lives into their eighties they often experience the back half of what Riddell calls the “spending smile,” when their healthcare expenses late in retirement mean they’re matching their early retirement travel and lifestyle expenses.
Despite the common overlaps between pension goals and the aims of a retail financial advisor, Riddell highlights a key difference that often means he places less emphasis on structured products when he tries to manage those risks: solutions designed for group plans don’t account for the unpredictability of an individual person’s life. They can have liquidity issues that individuals can struggle with. “Everyone will say they don’t need the money now until they need the money,” Riddell says.
"Many of the outcomes retirees seek from structured products, income stability, downside protection, and peace of mind, can often be achieved through thoughtful planning and disciplined portfolio construction," He adds. That said, there are situations where Riddell will make use of a structured product.
Appropriate use and quality assessment in structured products
While structured products aren’t core to his approach, Riddell makes situational use of them in the case of clients who need behavioural controls in their portfolios. Clients who want a clearly defined outcome, who acknowledge their own lack of capacity to stomach risk, and who want strong downside protection can be well served by this product set. Those benefits are attractive, he says, and could be worthwhile for clients who also clearly understand some of the liquidity drawbacks. If the alternative is a portfolio made of cash and GICs then Riddell thinks advisors should consider recommending some structured products.
In making those recommendations, advisors still need to appropriately present the right product for the right client. In assessing structured products Riddell begins with issuer risk, ensuring that issuers have longstanding reputations and strong financials. From there he will look at the flexibility of a product and the liquidity gates it places on clients. There is always a chance that a client’s circumstance changes, and he places a premium on flexibility to address that. Fundamentally, he needs a product that will help him tell his clients that they will be okay through a potentially multi-decade retirement.
“It really comes down to what structures we put in place that give clients permission and confidence to spend,” Riddell says. “It's the psychological side of retirement. If markets suddenly take a nose dive, what gives clients the confidence to say, 'I can still take that trip, I can still enjoy my retirement,’ because we’ve taken this thoughtful approach to the plan?”
