We see active financial advice as the new reality. Not robo. Not passive. But active!
Today, we can see an emerging problem with the “do it yourself,” “set it and forget it,” “autopilot” approach – a problem that can be most clearly illustrated using target date funds.
The industry had $2.8 trillion in assets in 2020, reports Pensions & Investments citing Morningstar. As such, the industry houses one of the largest automated retirement approaches available today.
Target date funds come with different end dates (e.g. 2030, 2040), glide paths and an automated shift of stock and bond allocations. Fund companies popularized automating allocations over time to provide a “safer” investment as a client ages. For example, a target date fund with a 2040 end date may today hold an 80/20 stock-to-bond mix, but could eventually end with a 30/70 stock-to-bond mix during the early years of the average person’s three-decade retirement. The original thesis presumably was altruistic: how to help millions of retirees avoid making bad investment decisions, as evidenced in the repeated findings of underperformance by the average investor in DALBAR’s annual Qualitative Analysis of Investor Behavior study.
However, the challenge is that market environments can change radically over the long lives of these products. What once seemed like a good solution can become stale, perhaps even harmful. Interest rates are hovering around historic lows, while inflation rates may be moving up. Such a combination would result in projected, inflation-adjusted rates of return for bonds that would be anemic. And yet these products are designed – and contractually obligated – to drive more and more of a client’s assets into global fixed-income markets. Simple math would suggest that with this set of circumstances clients may run out of money quicker — perhaps much quicker — than they realize.
That’s why Horizon Investments views active financial advice as the new reality. That advice, we believe, must include reviewing products like target date funds, communicating with clients about their asset mix, assessing the current investment environment and providing appropriate adjustments. In other words, financial advisors can help take their clients off autopilot.
That’s all the more true, we think, in light of the potential macroeconomic changes highlighted in our main Q2 Focus article. Whether it’s inflation, blockchain, demographics or the life events we all experience, it’s active advice that can navigate a dynamic world.
1Target-date funds see assets climb in 2020 despite pandemic – Morningstar, Pensions & Investments, March 18, 2021
2Investors Reacted to Market Crisis in Unprecedented Fashion – Dalbar, 2021
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