Find out how different types of assets, combined in new ways, may address longevity risks more completely. Multi-asset class strategist Dr. Brian Jacobsen provides examples.

Jon Lagerstedt: Find out how different types of assets, combined in new ways, may help your clients address longevity risks more completely. I’m Jon Lagerstedt, and this is The Essential Practice podcast. Dr. Brian Jacobsen, senior investment strategist with the Wells Fargo Asset Management Multi-Asset Solutions Team joins us once again. Brian, welcome.

Brian Jacobsen: Thank you for having me back.

Jon: Absolutely. What we’re getting into today comes from a broader topic Brian wrote about on the AdvantageVoice® blog on November 29 titled, “Beyond glide paths: Factors and target date funds”. So while we’re drilling into one specific aspect of the article, give the full article a read to help you have a better conversation with your clients about target date investing. I’d also like point our audience to episodes 339 and 340 where Todd and I discuss longevity challenges clients face. But in this episode we’re addressing a solution. And to level-set, in your article, Brian, you lend an understanding of longevity risks by viewing one’s assets in three different dimensions. Explain “accumulation risk” for us, if you would.

Brian: On our team, we try to set a rather conservative goal for at retirement, which is effectively what would it cost that at retirement for the person to purchase an inflation-adjusted immediate annuity. So the accumulation risk then is: What’s the likelihood that your savings and investment strategy is going to fall short of that particular goal?

Jon: Excellent, Brian, and you speak of the “success rate risk”. Could you tell us a little bit about that?

Brian: So while accumulation risk has to deal with the likelihood of hitting that goal, success rate is more about what is the probability of falling short of that. So it’s a mixture of with accumulation risk, what’s the magnitude of the miss, and then success rate risk is what’s the probability of that miss.

Jon: And the third risk that you talk about in the article is “shortfall risk”. What’s that all about?

Brian: Well, success rate risk is about what’s the likelihood of falling short. Shortfall risk is: Let’s assume that you do fall short of that goal – by how much? What’s the expected value of that shortfall? Because it’s one thing to miss the target by, say, a couple dollars. It’s another thing to miss it by a couple hundred thousand.

Jon: How do different types of assets combined in new ways address risks more completely, as you talk about in the blog post?

Brian: So the way that we look at it on the Multi-Asset Solutions Team is we don’t really try to confine ourselves to particular asset classes. One of the things that we like to do when designing strategies for saving for a particular goal, especially for retirement, is ask are there ways in which we can invest in a particular asset class in a way that improves the expected risk-return tradeoff of that asset class. We think that one of the ways is to take more of a factor-based approach.

Jon: So Brian, if I can jump in real quick, could you take a moment just to explain to our audience what factors are?

Brian: Factors are simply features of securities that make a difference in explaining risks and returns.

Jon: Brian, you’ve been talking about working with financial advisors and their clients working towards retirement. How does this work for those that are currently in retirement?

Brian: So a factor-based approach, we think, can give a better balance between the market risk and longevity risk. While you’re saving for retirement, your wage inflation that you experience is kind of like a natural offset to consumer price inflation. But when you get into retirement itself, you lose that natural offset. Then suddenly, your investment portfolio needs to do the heavy lifting. That’s why when we design retirement strategies, you have assets that typically you would expect to rise in value if inflation begins to pick up. Because a person in retirement doesn’t have the luxury of having wages to help protect themselves against the pernicious effects of inflation.

Jon: Brian, that was fascinating, and I wonder, do you believe you can integrate asset allocation and asset selection to improve retirement outcomes?

Brian: Well, I think that it’s necessary to do it.  When in fact, if you think about what is the optimal way to build a portfolio, it’s really starting from what are those building blocks that you have and then how can you put them together into an asset allocation model or a portfolio for the client. So by just fixating on, say, the glide path and saying that I’m going to choose on the basis of that without considering what those underlying building blocks are, I think that’s missing a really important dimension to trying to come up with a solution to the retirement problem.

Jon: Fantastic, Brian. Well, that’s all the time we’ll have today, but I wanted to thank you for being our special guest once again.

Brian: Oh, it’s always my pleasure. Thank you so much.

Jon: And get more from Brian on our companion podcast On the Trading Desk® and on our blog AdvantageVoice®. Until next time, I’m Jon Lagerstedt, and this is The Essential Practice Podcast.


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