How advisors can set their clients up for retirement success

How advisors can set their clients up for retirement success

How advisors can set their clients up for retirement success

In this special guest article, senior fixed income strategist at WisdomTree Kevin Flanagan explains how and why advisors should be using fixed income ETFs in the current environment.


“Canadians from the ‘Baby Boomer’ generation are expected to transition out of the workforce over the next five years, which means that retirement planning is top of mind during this year’s registered retirement savings plan (RRSP) season. As advisors seek to help their clients meet their retirement goals, particularly to generate income in retirement, fixed-income allocations should play an integral role in their portfolio.

Fixed-income investment solutions provide steadier, more reliable sources of income and should increasingly become a larger part of an investor’s portfolio as they near their retirement years.

The addition of fixed-income ETFs into the marketplace as an investment solution has provided advisors and their clients with new opportunities to gain more potential income over time. Whereas in the past, advisors may have been selecting individual bonds on behalf of their clients, today the ETF wrapper offers an easy-to-use vehicle with complete transparency and at a low cost; all important aspects when helping clients achieve their retirement goals.

In addition, they can help facilitate execution. In other words, instead of trying to build a diversified bond portfolio on your own using individual bonds, fixed income ETFs can offer an asset allocation approach in the same wrapper.

When determining which type of fixed-income ETFs advisors should incorporate into a client’s portfolio, it is important to identify the client’s goals, risk tolerance and time horizon. Advisors can start with a core fixed-income strategy that focuses on yield enhancement as the initial building block for the client’s portfolio. These core holdings can then be complemented by additional strategies such as short duration fixed income and/or emerging market debt, depending on which life stage the client may be in. For instance, a client in their early thirties could benefit from investing in emerging market debt, while investors near or in retirement would likely want to look for less-risky areas of the fixed-income market.

Protecting Against Interest Rate Risk

It is important to consider the interest rate environment in Canada. Although rates have risen, they remain historically low. Eventually, it is expected that we will see a more normalized economic backdrop. As global monetary policies normalize, investors may see their portfolios subject to interest rate risk. In Canada, we’ve already witnessed some surprises on this front as the Bank of Canada has raised rates and seems likely to continue on this path in 2018, if not beyond. Clients actively preparing for retirement may want to take this type of environment into consideration. Against this backdrop, advisors can utilize shorter-duration fixed income ETFs to help hedge against this risk.

It is important to reiterate to clients that if they have a solid, core allocation to fixed income ETFs, their portfolio should be able to withstand potentially volatile market environments over the long-term. Employing additional tactical strategies can help address concerns as they relate to the current landscape.

Don’t Forget to Complement Equity Exposures

Another important and often overlooked aspect of the fixed-income allocation of an investor’s portfolio is how that exposure complements the equity exposure within the portfolio. Rather than simply focusing on the fixed-income strategy, the portfolio should be looked at holistically, including equity and alternative investments. Are you over-extending your client in areas of risk where you don’t want to be? Are they overexposed to particular regions or sectors? When looking at it from this approach, you can better view how the fixed income portion makes sense overall.

Ultimately, implementing a holistic, diversified asset allocation approach using ETFs can help your client reach their long-term retirement goals.”

This material contains the opinions of the author, which are subject to change, and should not to be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.

 

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