Financial advisers continue to be tested to adapt to new market conditions. Retiree expectations are also evolving as they increasingly look to their advisers for guidance, support and protection. The opportunity for advice has never been greater yet portfolio construction has never been tougher.

The following webinar summary serves to highlight key takeaways for financial advisers to win, serve and retain retirees and pre-retirees, what they need to look out for and how Future Safe, an innovative retirement focused investment solution, can help your clients retire well.

Webinar One – The Theory

Current market conditions have triggered a series of risks that have the potential to significantly impact the way advisers build portfolios, affecting the livelihood of retirees now and into the future:

  • Cash is going backwards
  • Low yielding defensive assets
  • Coping with an equity market correction

Whilst commonly used asset classes such as fixed income, cash and equities still have a place in retirement portfolios, adequate safeguarding against inherent retirement risks is needed.

Cash and Term Deposits, for example, offer important features in retirement portfolios in providing certainty of return and protection yet in this environment they are no longer the retirement portfolio ‘first resort’ and are the first of the ‘triple threat’.

The second threat, the low yield environment, was cited as forcing investors to look for more attractive yield up the risk curve and the ‘fear of heights’ or coping with an equity market correction was called out as the third threat to retirement portfolios.

The value of the share market has ballooned recently. Despite delivering attractive long-term returns, many retirees cannot risk excessive exposure to equity markets.

Even a small correction at these stretched valuations can cause significant losses in portfolios leaving them vulnerable to technical risks such as longevity and sequencing risk.

In fact, any loss can have a significant long-term impact on their ability to fund their desired lifestyle.

Confronting the threats and enhancing retirement outcomes

To tackle the ‘triple threat’ investment challenges head-on, advisers are urged to explore retirement specific solutions capable of generating higher returns with the added benefit of downside protection.

Future Safe guarantees a range of outcomes, safety and security which is generally only available through a prudentially regulated life company.

Whilst it’s critical that clients have exposure to growth assets in this environment, it needs to be in a safeguarded way with value delivered in four critical ways:

  • protection
  • growth
  • access to capital
  • flexibility

Webinar Two takes a closer look at Allianz Retire+ Future Safe, our innovative retirement income solution, its potential role in a retiree’s portfolio and how to implement.

Webinar Two – In Practice

To help address each of the ‘triple threats’, Future Safe works best when applied as a:

  • cash replacement
  • defensive alternative
  • equity protection

Before exploring the many ways in which Future Safe can be set up and applied to a retirement portfolio, a further outline of Future Safe was provided:

  • an investment product issued by a life insurance company, Allianz Retire+
  • simple way of accessing the share market
  • fixed interest option available
  • suited to conservative investors seeking a guaranteed range of outcomes over a 7 or 10 year term
  • helps rebalance risk and return via downside protection, the ‘floor’, and the potential for higher returns, up to the ‘cap’.
  • clients have the ability to pick and choose the level of protection corresponding to their risk appetite and investment strategy, on an annual basis
  • a deemed asset for Centrelink purposes

New advice triggers need new solutions

Cash replacement
New market conditions have generated new advice triggers warranting the use of new, retirement focused, innovative solutions. An example was provided using the current caps and rates for a 10 year term, and a zero per cent floor for a $100,000 investment. Net of fees and taxes and other assumptions outlined during the webinar, the client could experience a potential upside of 1.89%. This is far greater than the 25bps gained from a 12 month term deposit rate, using your clients’ excess cash holdings. It was also noted that clients could adjust the floors on the annual anniversary with an associated change in the caps.

The fixed rate option of Future Safe was also outlined. Referring to the same assumptions and net of fees and taxes, the potential upside gained could be 1.3%, seven times what is earned on a 25bps, 12 month term deposit rate.

Defensive alternative
The falling interest rate environment is having a significant impact on the way portfolios are being constructed. Referring to the Callan Associates Risk Business 2016 report (updated 2019), only 4% of the portfolio’s assets could afford to be in defensive assets in order to generate an expected return of 7.5%. 96% of the portfolio needed to be in growth. It was also noted that retirees have a very high aversion to loss and seek to de-risk portfolios – it’s not an ideal solution for them.

Downside protection
In the current era of lower-for-longer interest rates, growing global risks and stretched share market valuations, reluctantly, clients are having to roam up the risk ladder to achieve meaningful yield.

Future Safe offers clients the ability to offload some of the risk by being able to select how much they are willing to forego should the share market fall, by electing a ‘floor’ with a corresponding ‘cap’. This enables clients to confidently stay in the market knowing they have protection against market losses.

Quantified probability of success
Advisers are able to quantify the benefits of using Future Safe through the use of stochastic modelling. Forward looking expectations are plugged in an online tool, along with other inputs and assumptions (i.e. clients’ assets, retirement income goals and any future cash flow requirements), to generate a tailored Retirement Portfolio Impact Illustration Report.
The Report provides you and your clients with a comprehensive understanding of how Future Safe could increase the probability of success in retirement: future potential outcomes, preparing them for what may happen and how Future Safe can be used to help mitigate against any risk.

Application of Future Safe – three common approaches used by advisers today

Managed Accounts and Model Portfolios
Future Safe can be used alongside Managed Accounts or Model Portfolios. It was suggested, depending on the way a portfolio was constructed and depending on the floor chosen, a 30% allocation to Future Safe would be considered a defensive asset. The remaining 70% of the portfolio would need to be invested in line with a growth portfolio (85% growth and 15% defensive) to provide an overall 60/40 portfolio.

Bucketing
To help mitigate against sequencing risk, it was suggested that a fourth bucket, dedicated to protection, be introduced.
It was also noted that the protection bucket would be funded by a proportion of the defensive bucket and some of the cash (to help reduce the cash drag on the portfolio) which is then used to pay out an income stream.

Protected equity approach
Despite delivering attractive long-term returns, many retirees cannot risk excessive equity exposure. Whether it’s sequencing risk or loss aversion, a downturn in equity markets can significantly impact both the journey and the outcome of retirement.

A hypothetical equity portfolio example was outlined. A $100,000 investment on 1 September 2006 with a 50% allocation to the MSCI World Net in AUD index and the S&P/ASX 200 Total Price Return index that rode the negative returns of the GFC would have bounced back to achieve a balance of $256k by the end of 2021. Using a Cash+ Fund (index enhanced fund tracking the AusBond Index), if a client sold out at the bottom of the GFC (1 March 2009) to cash, they would still be there today – with no recovery.

Future Safe can help play a pivotal role in helping clients stay invested during periods of volatility and heightened anxiety. Through the -10% floor option, clients have peace of mind that their losses are limited, helping to avoid dangerous emotional responses like selling down near to bottom of the market. By the end of 2020, these investors would have recovered from the GFC fall and been protected from COVID impacts resulting in an account value of $216k.

This scenario demonstrates that at times clients require more protection than what they can gain through diversification alone. Clients moving to cash or to an overly conservative asset allocation in an effort to time markets or address concerns around risks may not necessarily be the right approach. Future Safe will allow clients to stay in, or get back into, the market and benefit from the higher potential of equity markets with added certainty through the 10% floor.

A poll conducted during the webinar reinforced that a vast majority of advisers have clients in this scenario highlighting how common this issue is, looking for a protected equity solution such as Future Safe.

Parting notes

Advisers have a significant opportunity to enhance their retirement proposition, offering protection and growth potential through the use of Future Safe. Further insights into the probability of achieving successful outcomes can be achieved through the use of stochastic modelling, providing your clients with more peace of mind, to assist with planning and to help set expectations.

If you missed portions of the live event or want to go back and watch the sessions you were unable to attend, on demand access is available here. CPD points are still available.

For a discussion on how you might use Future Safe with your clients and for assistance with the stochastic modelling tool, contact your Business Development Manager or call 1300 421 060.

This material is issued by Allianz Australia Life Insurance Limited, ABN 27 076 033 782, AFSL 296559 (Allianz Retire+). Allianz Retire+ is a registered business name of Allianz Australia Life Insurance Limited.
This information is current as at October 2021 unless otherwise specified. This information has been prepared specifically for authorised financial advisers in Australia, and is not intended for retail investors. It does not take account of any person’s objectives, financial situation or needs. Before acting on anything contained in this material, you should consider the appropriateness of the information received, having regard to your objectives, financial situation and needs. The returns on the Future Safe product are subject to a number of variables including investor elections, market performance and other external factors, and may differ from the information contained herein. Past performance is not a reliable indicator of future performance.
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