Month: November 2017

A solution advisors need to know to keep aging clients secure

Today life expectancy is 10 years longer than it was 50 years ago and for the first time in Canada’s history, there are now more people aged 65 and older than there are children under 14. Given the stats, some advocacy groups say its time for a National Senior’s Strategy.  

The Canadian Medical Associations (CMA) is warning that hospitals cannot be seen as the safety net for long-term care of the elderly. Polls suggest most prefer to stay in the comfort of their own home. However, maintaining that independence comes at a financial cost and therefore a new approach towards investing by seniors is now required.

With age expectancy on the rise, financial advisors have an opportunity to be part of the solution. Helping to build up a nest egg is one thing but advising a senior to strategically invest and withdraw money over their remaining years is even more valuable.

Seniors and old models of investing

Traditionally, bonds were seen as safe, low risk investments and the principal means of preserving wealth. As clients approached retirement age, bonds like GICs, Canada Savings Bonds and money market funds were recommended over equities because of their financial stability. This was a great approach when interest rates were 18 per cent in the early 80s but in today’s markets with GIC rates less than 3 per cent, seniors run the risk of falling into the red when you consider inflation, fees and taxes.

“With today’s GICs rates, it is difficult to generate the kind of income that seniors expect and need to maintain their independent lifestyle,” says Ryan Kirke, a Chartered Financial Planner with Provisus Wealth Management and Transcend.ca. “When you think of the long-term costs associated with increased life expectancy, activities like transportation and meal preparation will become more challenging over time, especially if there is no family nearby.”

“With the added costs that are necessary for seniors, they need to make sure their investment returns keep pace for a longer period of time,” advises Kirke.

Taking action for your clients

While bonds in the near future are not likely to be wealth builders, they do need to be part of an individual’s portfolio. The not quite million dollar question is, how much? We know bonds and GICs can act as a form of insurance when things turn ugly in the market and are excellent sources of liquidity.  But the reality is that many seniors would be satisfied if they could get a decent return on such investments and live off the interest while protecting their capital.

“Most of my senior clients, aren’t interested in exciting anymore,” says Lise Allin of Lise Allin Insurance and Estate Planning Services in Belleville Ontario. “They want predictable, steady returns, and to work with an advisor who is knowledgeable.”

Allin knows that older clients want something safe and reasonable. “Some have lost their life-long partner, and don’t have that soundboard to run decisions by anymore.” she says. “They need assurances about what will guarantee them comfort in their later years.”

This can be tricky for financial advisors who want a steady income for clients without eroding their capital. Allin vividly remembers one case involving a senior, now her client, who in a 10 year time span with an investment bank, saw his wealth at retirement go from $1.2 M to $750,000.

This person had worked for 40 years to accumulate his wealth. Now a widower and with his kids living far away, he was concerned. “As our seniors age, the last thing we want to add is financial worry. Many still want to be able to leave their kids an inheritance, but they have to be on the right investment trajectory,” Allin asserts.

Since that time, Allin, working with Provisus Wealth Management, has been able to stabilize her client’s investments around the $750,000 mark, while he is still able to withdraw the $40,000 he needs on a yearly basis. “We were able to do this largely with the help of our investment partner Provisus who is able to meet our targets while charging much lower fees,” says Allin.

New fund model

With this type of situation becoming more frequent for many investors, one firm offering a solution is Provisus Wealth Management. The firm recently celebrated its 10 year anniversary and its fourth year on the Profit 500 list. This September, a year after opening a new arm to its business called Transcend.ca, the company launched the Multi-Strategy High Yield Fixed Income Fund which is designed to target the risk of short term bonds and generate greater performance.

“It attempts to provide an attractive cash yield and stable returns, while investing in a broad range of non-equity assets,” says Chris Ambridge, President of Provisus Wealth Management and Transcend.ca.

The fund is made up of corporate bonds, convertible bonds, preferred shares, incomes trusts, REITS, mortgages, secured real estate backed lending, infrastructure products and alternative strategies. It also uses Transcend’s trademarked Pay-for-Performance™ fee model with a fixed annual management fee of 0.25 percent. A performance fee is charged only if the fund outperforms a pre-set industry benchmark – a fee philosophy that Ambridge argues is a very strong incentive for the fund to achieve positive results for clients.

“I’ve been working with Chris’s team for the last ten years,” says Lise Allin. “The company has some of the best money managers around and its service provides me with peace of mind. Most importantly, it has produced stable results for my clients.”

Advisors part of the solution

The new fund is part of Provisus’ ongoing movement in rethinking how advisors can plan for a client’s retirement but also how we can help our seniors responsibly. The new investment landscape means playing it safe for seniors can do more harm than good. They face the unknown danger of outliving their savings and simply cannot afford not to take a level of risk with their investments.

Advisors need to explain why a new approach is necessary and also provide better investment options. Doing so will ease the burden of financial worries that many seniors face on a daily basis.  

 

Range Bound No More

After every major bull market, stocks typically become range bound and experience a sideways pattern with many optimistic and pessimistic periods before exiting 15 to 30 years later at about where it began. This has occurred in the U.S. five distinct times since 1870: 1870 to 1900 (lasting 30 years); 1902 to 1927 (25 years); 1935 to 1950 (15 years); 1965 to 1980 (15 years) and of course the most recent starting in 2000. Although Canadian stock market history does not extend back quite so far the pattern is very much the same, which should be expected since we march to the same drummer. Ultimately, the advancing economic recovery results in enough earnings growth that stocks that once seemed expensive are now bargains, and triggers a new bull market when stocks break through the upper constraints of the range.

transcend-october

Back in 2008, following a robust record high equity bull market, investors were feeling optimistic. Not surprisingly the flows into equities were significant. This was when the current sideways market began with a bull market peak of 15,073 in June 2008 for the S&P/TSX index. Seven years later in April 2015, the market was barely higher at 15,451. The market continued to oscillate for the next two years, unable to climb above 15,500. However, this began to change over the last two months.

History is a reasonable guide for what might occur next and it has suggested a new bull market is fully established once the range is broken. Only those perceptive enough to see though the market “noise” will be rewarded by the time the new upward trend is well entrenched. And it appears the markets have now finally broken out of this range by firmly establishing new highs.

transcend-october2

As is evident in the chart to the right and in the table to the left, the equity market’s gyrations over the last 10 years have produced little tangible gains unless investors were astute enough to tactically determine the right time to buy and sell stocks. History suggests that investors with a long term horizon will achieve better returns in equities (probably 6% to 9% annualized) than in most other investments.

Investors have been pulling money out of equities and adopting bonds as the “must have” alternative, which was part of a broader trend that has been going on since the middle of the last decade. The financial crisis of 2008 made investors increasingly more risk averse and drove them to higher yielding investments as a way to maximize their returns in an era where longer term gains from the prices of stocks alone had proven elusive. With a record 21% of the workforce now aged over 55 and growing quickly, the asset mix of the general population is structurally biased towards instruments that generate an income stream as concerns over retirement percolate. This had put more pressure on stock valuations and dampened the desire for riskier assets.

Following extended periods of weakness, history shows that the future should be quite bright. After all of the worst performing 10 year periods since 1926, the following 10 year average returns were close to 11% and the lowest of those subsequent returns was still over 7%. Logic would dictate that investors should take profits in those asset classes that had performed the best, which in Canada were bonds and real estate, and seek returns in the weakest asset class, which has been equities. In the midst of the current equity rally, ten year government bonds are yielding less than 2% so a potential annualized return of 7% in equities over the next 10 years would be very attractive.

Market Data

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This report may contain forward looking statements. Forward looking statements are not guarantees of future performance as actual events and results could differ materially from those expressed or implied. The information in this publication does not constitute investment advice by Provisus Wealth Management Limited and is provided for informational purposes only and therefore is not an offer to buy or sell securities. Past performance may not be indicative of future results.

While every effort has been made to ensure the correctness of the numbers and data presented, Provisus Wealth Management does not warrant the accuracy of the data in this publication. This publication is for informational purposes only