Tag Archives: Wade Matterson

Goal tolerance: When goals meet risk tolerance

There are clear reasons why risk tolerance drives the financial advice process. It produces a simple number, which makes it relatively easy to recommend investment products while maintaining a compliant paper trail. But such a heavy reliance on risk tolerance can also produce significant problems.

Risk tolerance is too often thought of as an unchangeable number even though there is little academic guidance on the most effective way to measure it, leading to widely varying estimates (and subsequently portfolios) between advisers.

Placing a greater emphasis on clients’ objectives and wrapping this around their risk tolerance can produce higher levels of engagement and offers a more accurate pointer to investor behaviour. Milliman’s Wade Matterson and Craig McCulloch offer some perspective in this article.

Is a comfortable retirement possible in the superannuation world?

The ASFA Retirement Standard states that an average Australian couple requires about A$640,000 in their superannuation fund at retirement (or AUD 545,000 for a single person) to live comfortably. According to Milliman’s Jeff Gebler and Wade Matterson, “The personalised nature of each superannuation member’s retirement journey means a one-size-fits-all approach simply cannot deliver the necessary information, products, and risk management strategies required to achieve everyone’s desired outcomes.”

In the article “Why the industry’s ‘comfortable retirement’ measures are wrong,” Gebler and Matterson discuss the need for enhanced benchmarks based on available data and communication strategies to deliver better financial outcomes that individuals can live with comfortably.

Managed risk equities can reduce retiree loss aversion

Many individuals entering or nearing retirement encounter the risk tolerance paradox. They seek asset growth with an aversion to losses. This conflicting mindset prompts some investors to acquire low-risk assets when markets become volatile, essentially locking in losses while trading market risk for longevity risk.

According to Milliman’s Wade Matterson, “introducing managed risk equities into the portfolio of clients close to (or in) retirement can provide exposure to higher returns while managing the inherent higher risk.” He provides perspective on what investors should consider when using managed risk equities in his article “Solving the risk tolerance paradox for retirees.”

Managing Australians’ longevity and investment risks closer to retirement

Reducing an investor’s exposure to growth assets as retirement is approached is common. However, this strategy may increase the chance that an investor will outlive retirement savings. This is a predicament that many Australians face. In his article “Australia’s retirement challenge,” Milliman consultant Wade Matterson offers some perspective on how strategies employing derivatives can help Australians manage longevity and investment risks.

Surviving the longevity “Sharknado”

Matterson-WadeYou’re probably well aware of the Sharknado phenomenon—a straight-to-television disaster movie, where a water spout lifts sharks out of the ocean and deposits them in downtown Los Angeles. The heroes deal admirably with this inexplicable influx of predators and after much bloodshed, emerge victorious.

While the movie was distinctly B grade, the media hype that accompanied it was simply astonishing. It got me thinking about what makes a good/bad disaster movie, given the formulaic approach they tend to adopt:

1. Think of some absurd concept—the crazier the better.
2. Identify with an individual or group fighting to survive.
3. Against all odds, and with much bloodshed, the hero overcomes all.

This is all well and good, but what does this have to do with financial planning? Well, it seems that as an industry we are potentially in the midst of our very own, slow-moving disaster movie—that is, the onslaught of the aging population and the impact of longevity. Now while seeing a great white pointer coming out of a tornado may seem slightly more daunting than a geriatric surfing a tidal wave, the impact of the latter is much more profound, predictable, and likely.

The statistics themselves are simply staggering. By 2050, almost a quarter of the population will be over 65 compared to 14% now. Given that almost 65% of all superannuation assets are held by people between the age of 45 and 54, the amount of money in motion as this group retires will be too large to ignore. As our “Politics of Pensions” thought piece highlights, the implications are broad and will impact on all corners of the Australian community, from business owners and taxpayers through to government policy makers.

When observed through this lens, the impending pressure of longevity has much in common with our traditional disaster movie. It’s no surprise that much of the language adopted by the media and those in the industry attempting to highlight the issues is very similar to what you might find on a movie poster—the “Longevity Tsunami” paper written by the Actuaries Institute (available here) is a good example.

Combine this with the impact of the sweeping reform that the industry has been subjected to, together with rapid technological advances, and the industry is facing a perfect storm (another great disaster epic). The ramifications for the advice industry are immense. Faced with increased demand, regulation, and complexity, there is both a risk and opportunity that presents itself to those up to the challenge.

Fortunately, we’re already seeing potential heroes step up to take on these issues head on. Successful advisers and early movers in this space appear to be taking similar paths, by:

• Retooling their advice proposition to become more strategic in nature, with increasing focus on client objectives
• Developing a hunger for understanding the complexity of the issues and becoming subject matter experts
• Leveraging the latest analytical tools to offer greater insight and value add

From the perspective of this website, both Lonsec and Milliman have set out to accompany you on this mission. As your partners, we intend to provide you with the necessary advice, research, and tools—all in a single and convenient location. We understand that there is not a silver bullet to solve these issues and that ultimately it will be a joint effort.

To this end, this site intends to provide relevant information across the following areas, including:

• Thought leadership
• Research
• Portfolio construction guidance and advice

There are also some exciting plans for the future, including the development of discussion forums and a variety of tools to assist advisers in their implementation of objectives-based advice.

Most importantly, we believe that the subscriber community has plenty to add in this space and that we will all benefit from the sharing of experience. You’re invited to participate in the conversation and we look forward to your comments.

With all this at your fingertips, we’ll help you navigate the challenges and avoid becoming shark bait.

This article first appeared at LonsecRetire.com.au.

Lifecycle funds, version 2.0

Smart defaults, lifecycle investing, and target date funds have been widely discussed since the global financial crisis highlighted the flaws in the traditional asset allocation approaches adopted for superannuation fund members. Superannuation is a type of long-term investment arrangement designed to help individuals accumulate savings for their retirement. It is a government-mandated program in Australia, akin to North America’s 401(k) system.

A recent article authored by Wade Matterson entitled “Sci-fi super” discusses a new generation of lifecycle approaches that use cutting-edge technologies to strengthen investment strategies exposed by the global financial crisis.

Here is an excerpt:

…The next generation of life cycle funds has learned from the mistakes of the past and addressed them via the use of three key features or enhancements to the existing vehicle. They can best be described as:

• Proximity sensors – broader mandates or strategic asset allocation ranges that can take into account views with respect to asset valuations and seek to navigate through them.

• A traffic GPS system – this has been implemented through the adoption of glide paths that target levels of volatility, rather than equity/bond allocations.

• Air bags – installing explicit risk management through the use of approaches such as hedging or tail-risk strategies that are capable of dealing with unforeseen events when the risk is the greatest.

Milliman’s Financial Risk Management (FRM) practice has helped in the implementation of these concepts in lifecycle funds in the United States and is currently exploring other options to bring these ideas to defined contribution (DC) participants.