In past iterations of the Financial Professional Outlook
survey, we’ve investigated how advisors approach investment income for retired clients. In the latest survey, advisors said they continue to face challenges in serving clients near or in retirement
, such as developing diversified investment strategies that may balance income and growth.
This is a challenge we hear about a lot in our conversations with advisors
, and one that we dug into deeply in the Financial Professional Outlook
by broadening the discussion to include all investors with a preference or need for income
Give me that yield!
In the survey, 82% of advisors said that yield-focused investment strategies (or strategies that rely on dividends and interest alone to provide income) are a strong option for some or the majority of their clients. Many advisors said they believe yield-focused strategies are simple for investors to understand
and that they may be able to protect the initial investment in the portfolio while being a more sustainable approach.
However, prioritizing simplicity and principal protection (which is somewhat of an income myth
!) isn’t typically the best approach. In fact, only a small number of advisors surveyed actually said that they recommend yield-focused strategies because they are superior to other strategies.This finding points squarely at a hazard of being overly-focused on yield
: it’s not always an optimal investment approach and such strategies can actually put sustainable income at risk.
Navigating the risks of generating yield
The constraints, risks and considerations of a yield-focused strategy can depend on the approach
. Of the products advisors said they use to generate income in client portfolios, the top selections were dividend paying stocks (83%), REITs (61%), corporate bonds (61%), high-yield bonds(53%) and traditional open-ended funds and ETFs (53%).
Income-focused products used today
When evaluating strategies, it’s essential to consider where yield is coming from
and ensure that potential risks are managed appropriately. In our experience, some of the risks advisors don’t always fully consider include:
- Risk of trading short-term income for long-term portfolio growth
- Risk of “high yield bonds” becoming “junk bonds”
- Risk of asset class or sector concentration
- Risk of home country bias
- Risk of liquidation issues
To help reduce the level of risk and portfolio volatility
, we believe income solutions should pursue a responsible level of yield through a well-diversi?ed, multi-asset approach that considers four factors:
- Balance: Balance today’s income needs with the portfolio’s longer-term objectives of growth for tomorrow.
- Diversification: Make sure a portfolio relies on a mixture of strategies, asset classes and globally diverse investments.
- Risk: Beware of overreaching for yield. The appropriateness of risk should be aligned to an investor’s individual ability to tolerate and weather risk.
- Adaptability: Yield-producing assets may require dynamic asset allocation adjustments. Be sure that such a portfolio has the ability to be adjusted with appropriate frequency.
In our view, the best way to manage these factors
is by taking a total-return
portfolio management approach that looks at interest, dividends and capital appreciation when considering the ability to generate income. To shift toward this type of approach, it can be helpful to talk through the following questions with your client:
- Why do you feel that you need income from your portfolio?
- How much income do you need?
- Do you expect the amount of necessary income to change over time?
- Are dividends and interest the only ways you want to generate that income, or are there other options to explore?
Once you can refocus the conversation on the investor’s goals
, circumstances and preferences, you are better equipped to design a disciplined investment approach that helps meet a client’s short-term needs without jeopardizing the ability to reach their desired financial outcomes.
The bottom line
When it comes to the challenge of generating income, it’s important to consider all the risks and potential opportunities and encourage clients to balance today’s concerns with the strategies that might help them create a more financially secure future.