The steadfast advisor: Managing retirees in their third bear market

Kjell Johnston

Senior Financial Advisor, Assante Financial Management Ltd.

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Over a career spanning two decades, industry veteran Kjell Johnston, Senior Financial Advisor, Assante Financial Management Ltd., has guided investors through multiple crises and downmarket cycles – now he shares his hard-won lessons about safeguarding retirees and near-retirees from the perils of an extreme market event.

Three major crises in three decades

Although my team and I work with a wide array of business owners, professionals and high-net-worth families, the clearest way to categorize our client base is by age. Younger clients tend to consult us primarily about debt management, whereas retirees and near-retirees – two groups at the core of our business – require fully customized financial and estate plans to meet their retirement goals.

Given their time horizon, these aging clients are particularly vulnerable to market crises. Many of them have been with us since I joined the firm in 1996, or longer, going back to when my father opened the practice in 1981. Yet, despite their heightened sensitivity, our team has managed to protect their portfolios from several major events over the past three decades.  Adaptation has been the key. Through the Dot Com Crash and the Great Financial Crisis, we have kept our client relationships strong by learning important lessons, implementing a robust planning process and switching to a disciplined investment strategy. Now we are continuing to evolve our business by adding tactical solutions to meet new challenges in the COVID-19 era – the third major crisis for both us and many of our clients.  

Start (and end) with capital preservation

The three years from 2007 to 2009 were extremely challenging for me to endure as a young Advisor. However, I came through the experience a more seasoned professional, with a razor-sharp focus on capital preservation and holistic financial planning. I learned that investments with low betas can manage downside risks, participate in most of the upside gains and provide some peace of mind about the future.

In fact, I soon realized that keeping the principal intact could result in positive surprises. Consider a scenario where an investor calls you thinking they have lost 30% of their portfolio. Perhaps they have been watching the news and know the broader market is slipping deeper into correction territory, which leads them to inquire about the performance of their funds. It can be quite a relief for them to see the portfolio is down only a fraction of the benchmark.

The older your clients get, the more they want to hear that their savings are safe and on track toward their long-term goals. And in our experience, a slow-and-steady investment philosophy is the best way to deliver on this promise throughout the macroeconomic cycle. It can give you the confidence to pull out the plan and say, “In the past five years, we have gone from here to there – and guess what? You’re ahead of your targets.” 

A comprehensive financial plan is critically important in this process, providing clear and realistic objectives for the investment side of the relationship, as well as opportunities for you to demonstrate your value-add. For instance, we directly contact our clients’ chartered accountant for their personal and corporate tax returns, in order to make sure tax optimization is considered throughout the portfolio. Without an overarching framework in place, we risk overlooking these crucial details.

Transition to pension-style asset management

After witnessing the devastation of the Great Financial Crisis, I knew that I didn’t want to actively manage portfolios through that type of environment again. The logistics were too chaotic; how could you make sure 150 different clients were rebalanced properly throughout the year to keep the weightings within their risk tolerance and take advantage of market volatility?

From my perspective, there’s a clear tradeoff between being a good Investment Advisor AND a great, proactive financial planner. At the same time, the industry and investors’ needs were evolving to a point where there was a stronger demand for financial and estate plans – so we transitioned our preference for investing to a pension-style approach. This is based on the fact that pension funds, due to their global diversification, multi-asset approach and process-driven rebalancing, typically have less downside and recover more quickly from market corrections. In fact, every single one of our clients’ core portfolios were rebalanced in late March this year near the bottom. 

The switch to the pension-style approach was delayed till 2012/2013 in order to give the portfolios time to recover their losses, given the depth of the equity correction and the fact we had higher exposure to equities in those days. Remember, our client base was 12 years younger then, and we felt confident there was sufficient runway for our client portfolios to reach back to all-time highs – as they did within about three or four years.

Meanwhile, my team, which consists of two full-time administrative assistants, and I gained more time for collecting information, analyzing the data, and consulting with our tax and estate planning specialists. We were able to go deep, asking our clients personal questions, such as: How do they want their estate handled after they’re gone? Do they want it split equally? If they have concerns about the children, do they want additional planning in place? Should we consider a testamentary trust to safeguard the money?

Sometimes this attention to detail comes as a surprise to prospective clients. Many of them say their previous Advisor offered estate planning, but with minimal input from them, yet when we ask for the output of those conversations, it becomes clear the deliverables lacked specificity and substance. By contrast, our goal is to be upfront at all times, because we have no desire to onboard clients with unrealistic expectations.

Add a tactical sleeve to manage uncertainty

Coming back to the present, it seems like a sustainable recovery from the COVID-19 pandemic will take longer than six months. When we entered this particular crisis, we were also coming to the end of a 10-year economic expansion. The Canadian consumer was weakened and up to their eyeballs in debt. And, at the same time, we started to see exhaustion in corporate earnings and other macro indicators – all of which suggests this recovery may be incredibly slow.

Given the sheer scale of this crisis, it’s possible that some retirees may feel a pinch on their withdrawal rate. For example, if a client takes out 3%-4% of their savings per year, and the portfolio is only expected to preserve capital at 1%-2% per annum for the next two years, the math suggests they should downshift spending temporarily, at least until markets recover.

What we learned from this scenario is that it’s sometimes necessary to put aside money in good years to ensure the withdrawal rate remains unaffected when the cycle turns. In other words, when the portfolio has a strong year, we should encourage the clients to leave the excess returns as a cushion, rather than using the money for unnecessary discretionary purchases.

Second, we should proactively find ways to boost income in the portfolio without creating a corresponding increase in risk. At the moment, we’re adding a tactical layer for new capital. These satellite pieces will serve as a complement to our core holding, bringing greater yield to the portfolio amid the low interest rate environment.

Remember what not to do

On the rare occasion that a client pushes for a more aggressive tilt in the portfolio, we explain the pension-style approach is based on a proven model where investors get to participate in upside growth without exposing themselves to all the downside. Practically speaking, this means following a disciplined process with the highest probability of reaching the desired outcomes stated in the client’s financial plan.

Equally important is NOT doing certain things; for example, not throwing darts at hot stocks or sectors, not straying from the investment policy statement, and not abandoning our core solutions. Instead, each time we encounter a new crisis we simply adapt to better manage risks that relate to us, and our clients.

Kjell Johnston on BMO Global Asset Management

Since 2013, our clients’ portfolios have been split on average, with ~60% devoted to a “long only equity strategy,” and ~40% towards defensive mandates. However, as we look to deploy new capital in the current environment, we want solutions that are 100% tactical. Since the March lows equity markets have rallied hard, fueled by over $5 trillion in Central Bank/Government intervention, and valuations today are somewhere near Mount Everest (i.e., sky high).

After spending more than three years of due diligence following Larry Berman, his track record of capital preservation and steady growth convinced me the BMO tactical ETF funds would make an ideal complement for my clients’ core accounts in this current environment. In fact, these are the first new investments I have used outside of my core holdings in more than seven years.

To gain more valuable insights, and tools for a resilient portfolio amid the current market volatility, contact your BMO Global Asset Management Regional Sales Representative and access our Volatility Centre.

Disclosures

Assante Financial Management Ltd. Disclosures:

Kjell Johnston, CFP®, is a Senior Financial Advisor with Assante Financial Management Ltd. Please contact him at [email protected] to discuss your particular circumstances prior to acting on the information above. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd.

 

BMO Global Asset Management Disclosures:

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp., BMO Asset Management Limited and BMO’s specialized investment management firms.

®/™Registered trade-marks/trade-mark of Bank of Montreal, used under license.

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