Advisors: Managing expectations starts with reality

Advisors: Managing expectations starts with reality

Advisors: Managing expectations starts with reality Advisors should be recommending smaller rates of return to investors when they build a plan for retirement to account for lower market returns, one advisor from the Hamilton area told WP.

“It’s not right and it’s totally incorrect for advisors to try to get more business out of clients by suggesting higher rates of return on investments,” said an advisor speaking on a condition of anonymity.

“Many investors use an eight per cent or 10 per cent potential rate of return when they build a plan for pre-retirement and retirement.  My belief is that investors should be using three projections using a three per cent, 4.5 per cent and 6 per cent potential rate of return, to account for possibly lower market returns in the future.”

With a management fee tacked on to the high rates of return, the advisor said it’s against better judgment and puts clients at risk because they haven’t adequately saved for retirement due to inflated projections.

“Just because you plug in the projects on the computer, doesn’t make it reality and advisors have to be careful about that because it can put someone at risk,” the advisor said. “You end up projecting more wealth than what’s being built, and that could have serious repercussions.”

The advisor’s comments highlights a debate between planners about the pursuit of consistent returns, which can provide strong performances without the volatility of a higher return and higher risk investment.

They also come at a time when investors are concerned about the risk of large losses and the growing threat of inflation, instead opting to stay conservative and witness their benchmark over-perform in down markets.

What’s time, a new study from BMO shows that 56 per cent of Canadian need help with their retirement portfolios and investments. Just over 50 per cent also acknowledged they need help to: understand how certain markets will react; learn when to make adjustments; ensure a diversified portfolio and determine their risk tolerance.

Another advisor in Toronto said that her firm uses a 2.5 to four per cent rate of return depending on the risk tolerance of the client.

“It’s a better to plan saving and spending on a number that you are more likely to outperform than underperform.  If you project at eight per cent and only achieve five per cent then you will have under-saved given your goals, or will run out of money prematurely in a retirement scenario.”

She adds that software projections don’t and can’t compare to what’s happening with markets in reality.

Most retirement planning software applies the return assumption each year and so the return is a steady compounded number,” she told WP. “In reality, unless the investment strategy is 100 per cent GICs, returns don’t come in a straight line.”

“A portfolio with a higher return but also higher volatility can result in a lower accumulated value than one that has a lower, but steady return.  So even if I think that a client will achieve 5.5 per cent on average, I use four per cent in the projection since it is compounding annually.”