Have a client portfolio down 2% this year? That may not be as bad as you think, with an investment strategist asking advisors to focus on ‘funded ratio’ not just asset growth
Many clients want to know how long it will take to double their money. Who doesn’t?
Russell Investments’ Shailesh Kshatriya, Director of Canadian Strategies, suggests there’s a more important question for advisors to answer and that’s understanding what’s happening on both sides of client’s balance sheet – assets but also liabilities – which Russell calls the “Funded Ratio.”
“It’s taking an institutional approach and adapting it for an individual investor. It’s not just the asset side of things, the total assets you currently have, but also looking at the liability side of the equation as well, said Kshatriya. “It allows you to look at both sides of the ledger.”
This 360 degree view of a client’s assets and liabilities allows you to get a better idea how prepared your client is going to be for retirement.
“As investment professionals we do ourselves a disservice by an overemphasis on performance especially when we speak with clients. What clients really care about at the end of the day is ‘Will I be okay?’ I don’t think all advisors have the proper tools to answer that question, which is what we’re trying to do with the funded ratio.”
Takes bonds for example. If you don’t understand what your client’s funded ratio is, you might not be able to make the right call when it comes to the fixed income portion of your client’s portfolio.
“One of the biggest concerns for conservative investors that we hear all the time is that interest rates are going to go up and that’s going to have a negative impact on your bonds,” said Kshatriya. “While interest rates moving higher can be a challenge for your bond portfolio, it’s not necessarily a bad thing for your funded ratio because what ends up happening is your discount rate increases as a result of the higher interest rate so the value by which you’re discounting your expected expenses is higher which actually reduces your current liabilities so your funded ratio now looks a heck of lot better.”
The bottom line for Kshatriya when it comes to the funded ratio is how clients feel about their retirement readiness.
“If the client’s portfolio is down 2% over the last 12 months but their funded ratio is 110%, the client doesn’t really need to worry,” Kshatriya believes. “Yes, there was a bit of a bump in the road and their portfolio was modestly down 2%, but they’re still on track. Your client will leave the office knowing they’re still doing okay.”
Russell Investments’ Shailesh Kshatriya, Director of Canadian Strategies, suggests there’s a more important question for advisors to answer and that’s understanding what’s happening on both sides of client’s balance sheet – assets but also liabilities – which Russell calls the “Funded Ratio.”
“It’s taking an institutional approach and adapting it for an individual investor. It’s not just the asset side of things, the total assets you currently have, but also looking at the liability side of the equation as well, said Kshatriya. “It allows you to look at both sides of the ledger.”
This 360 degree view of a client’s assets and liabilities allows you to get a better idea how prepared your client is going to be for retirement.
“As investment professionals we do ourselves a disservice by an overemphasis on performance especially when we speak with clients. What clients really care about at the end of the day is ‘Will I be okay?’ I don’t think all advisors have the proper tools to answer that question, which is what we’re trying to do with the funded ratio.”
Takes bonds for example. If you don’t understand what your client’s funded ratio is, you might not be able to make the right call when it comes to the fixed income portion of your client’s portfolio.
“One of the biggest concerns for conservative investors that we hear all the time is that interest rates are going to go up and that’s going to have a negative impact on your bonds,” said Kshatriya. “While interest rates moving higher can be a challenge for your bond portfolio, it’s not necessarily a bad thing for your funded ratio because what ends up happening is your discount rate increases as a result of the higher interest rate so the value by which you’re discounting your expected expenses is higher which actually reduces your current liabilities so your funded ratio now looks a heck of lot better.”
The bottom line for Kshatriya when it comes to the funded ratio is how clients feel about their retirement readiness.
“If the client’s portfolio is down 2% over the last 12 months but their funded ratio is 110%, the client doesn’t really need to worry,” Kshatriya believes. “Yes, there was a bit of a bump in the road and their portfolio was modestly down 2%, but they’re still on track. Your client will leave the office knowing they’re still doing okay.”
