Keeping pace with equity market benchmarks such as the S&P 500 or the Dow carry a strong pull for performance-driven advisors. However, that philosophy often finds itself at odds with the wishes of today’s investors and places portfolios in a dangerous situation—one that lacks downside protection and is too narrowly focused.
Not only that, but at Beacon, the average client age that most of our advisors serve are approaching retirement age. So not only does a portfolio based on a stock market benchmark create too much risk, it’s also inappropriate for that age group, leaving those clients either at or near retirement with a difficult task to ever rebuild their nest egg in the event of a catastrophic market drop.
At Beacon, we have found through our internal research that our clients’ number one concern in retirement is running out of money. And the best way to help them keep that from happening is with some form of downside protection. That information is backed up by recent data compiled by Cerulli Associates that found investors prefer a portfolio with an emphasis on downside protection versus one that focuses on beating market benchmarks by a three-to-one margin.
In a public statement following the release of that data, Scott Smith, director of advice relationships at Cerulli, said that it’s important for advisors and other financial institutions to “help investors become comfortable with the realities of equity market exposure. Balancing downside protection with the growth potential necessary to help investors reach their wealth accumulation goals is one of the most challenging scenarios facing financial services providers.”
A Plan of Action
At Beacon, we believe that begins by always working in a client’s best interest and gaining a true understanding of what a client’s needs are and how to best help them reach their goals. The disconnect occurs when an advisor might focus on shorter term market returns instead of emphasizing a longer time horizon such as the three-to-five years of a typical market cycle.
In helping develop the benchmarks for that time horizon, we’d suggest using inflation-plus indexes instead of stock benchmarks that are so heavily weighted and influenced by FAANG (Facebook, Apple, Amazon, Netflix and Google). Although those companies have driven the market growth in this current bull run, putting too much emphasis on them carries significant exposure to risk, risk you don’t want to saddle your clients with.
When you look to a more diverse portfolio, whether you use an inflation-plus benchmark or one focused on equal sector investing, you’re going to lag the market. But that’s okay and you can explain to your clients that although this portfolio will trail the market gains, it will also provide you with more protection for when the inevitable downturn hits.
That philosophy fits your clients’ needs and also aligns with their personal goals, according to Beacon research and Cerulli data. To learn more about how you can develop portfolios that provide downside protection for your clients, contact your wholesaler today!