By Richard Convy

Increasingly, financial planners  and wealth managers are hearing from current and potential clients who are turning to do-it-yourself investment strategies to build and manage their investment portfolios. The main advantage and driver of this behavior shift is the perceived reduced costs involved in taking control.

The average life expectancy for those who reach 65 years of age is 84 for men and 87 for women, which means the reduced costs of a lifetime of managing one’s own portfolio over a professionally managed portfolio can be substantial. The advent of discount brokerages, on-line trading tools, “robo” advisors and target date funds have come about to encourage do-it-yourself-ers. As a result, advisors must be able to articulate and demonstrate the value they add when working alongside of these new tools, and not just opposed to them.

According to a report published in May 2017 by the Federal Reserve Bank on the Economic Well-Being of U.S. Households, 28 percent of non-retired adults had no retirement savings and of those that did, 44 percent had saved less than $40,000. Good advisors must be capable of addressing this divide between what clients have saved for retirement and what they will need, commonly known as the “Retirement Gap.” This same survey also found that only 47 percent of DIY investors were comfortable with handling their own 401ks, IRAs or other outside retirement accounts.

Financial advisors providing counsel can acknowledge that DIY investing may help bridge the retirement gap by reducing portfolio management costs, but it can also result in other “gaps” opening wider. These include what some call the “reality gap,” or the difference between retirement expectations and savings; the gap in investing knowledge/understanding; the gap in investment behavior; and the gap in planning. Each of these gaps need to be bridged to achieve a successful retirement, and this often starts with an advisor who carefully lays out strategy and steps to execution.

Many investors, including DIY or those who rely upon wealth management professionals, need to determine what their retirement goal is, and then convert those goals into budget dollars. The goal of “a comfortable retirement” is meaningless unless you can pin a dollar amount to that desire. Once the amount has been determined, then the reality gap between prioritizing the goal and taking concrete action so reality can meet expectations, can begin.

There are many different investment alternatives that DIY investors are aware of and utilize, but also many that these same investors are unaware of or do not use to their full advantage. We call this the knowledge/understanding gap, a void that can be admirably filled by a knowledgeable advisor, for this very lack of understanding can result in sub-par investment results or unintentional risks. Advisors must understand where to fill in the cracks, such as with alternatives including cash value life insurance, variable and fixed annuities, alternative investment categories, trading strategies and hard assets. Each of these investment alternatives have unique characteristics and costs that must be understood before they can be prudently incorporated in to the DIY portfolio.

Investor behavior is another significant gap that must be bridged by DIY investors, and where once again, professional management plays a strong part. Historically, individual investors tend to react emotionally to moves in the market. They tend to focus on short-term events over long-term fundamentals. Overreacting to market, economic or political events results in ill-timed changes to their portfolios. One investment vehicle that may reduce this tendency to trade first and think later, is Target Date Funds (TDFs). TDF investors tend not to be as reactive to market events and have enjoyed a positive performance gap. However, not all TDFs are the same, as funds can differ in allocations, fees and reconstitution strategies even for the same target date. That is where the knowledge gap comes into play.

The planning gap is what we believe to be the most important aspect of forming a financial plan, and something professional investment managers often have considerable experience in doing. Have DIY investors determined how unexpected events can impact their portfolios? What about the impact of nursing home costs that on average run $92,000 per year but can approach $165,000 in high cost areas such as New York. How will multiple bear markets impact their portfolios and the ability to fund a retirement over multiple decades? How has inflation been factored in to their retirement budgets? What about cognitive decline? As we all know, seniors are the number one target of scammers. Is their asset allocation more aggressive than necessary to reach their retirement goal? Is the allocation too risk adverse, which will not be able to generate the returns necessary? As most professionals know, the ability to discuss multiple investment scenarios, stress test the portfolios and factor in “what if” situations is critical for any investor to bridge the gap, and is often best done with an advisor they trust.

Financial planners and wealth managers must find the right solutions for DIY investors in order to effectively address challenges and ultimately bridge the retirement gap. Creating a diversified portfolio at the appropriate risk level is only the beginning. Focusing on the multiple retirement gaps that are not cost related is a prudent alternative to cover the various challenges before reaching an enjoyable retirement.  

Richard Convy, CFA, CPA, is the President of AAFMAA Wealth Management & Trust LLC, an organization that provides financial planning, investment management, trust services exclusively to the U.S. military community.

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