New adviser risk management strategy needed: Milliman
Financial advisers have been encouraged to tackle diversifiable and systematic risk simultaneously to meet the needs of a growing base of retirees seeking advice.
In a paper entitled ‘The Risk Tolerance Paradox', risk management firm Milliman insisted too many investors were being told to "stay invested in the market" and "ride out volatility" — advice that is often not appropriate for retirees.
"When an individual must use a portfolio to meet current income needs, it is not always possible to ‘ride out the storm'," the paper said.
Instead, it proposed a hedging strategy combining broad market access and a risk management overlay.
It said by stabilising the volatility of a fund daily, at a set level, the futures-based strategy preserves capital, which can be harvested and reinvested in growth assets during a downturn.
Milliman Australia said the approach could be more suitable for retirees in the Australian market.
‘Following several years of preoccupation with Future of Financial Advice and MySuper, we have begun to see a strong increase in demand for retirement solutions that address key issues around risk management and retirement," Wade Matterson, of Milliman Australia, said.
‘Our work with Plato Investment Management, who recently launched a Managed Risk Income Fund and Maritime Super, highlights the momentum that is building in the industry and the increased appetite to create solutions which address some of these issues.'
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