In the past 20 years, financial planners and their clients have ridden a stock market roller coaster.

The benchmark S&P 500 index soared from 440 in 1994 to 1,527 in 2000, down to 777 in 2002, up to 1,565 in 2007, down to 677 in 2009 and well past 1,800 this year. What lessons have advisors learned from wave after wave of bull and bear markets?


“I’ve learned that there’s a difference between acting as a personal financial planner and acting as an asset manager,” says Vicki Brackens, who heads a financial services firm in Syracuse, N.Y., that’s affiliated with Lincoln Financial Advisors. “As a planner, there’s more focus on helping clients meet their particular goals, at a specified time. When a client’s child will be enrolling in college, for example, the financial plan must hit a particular date. You need to build in a safety net.”

Although Brackens says she has become more conservative in the last 20 years, she quickly adds that she’s not running away from equities. Instead, she has become much more cautious about overallocating to any one type of investment.

“We check our funds to see that their holdings aren’t overlapping,” Brackens says. “We diversify into many asset classes; we rebalance clients’ asset allocations regularly; we include products that offer protection; and we pay a great deal of attention to tax consequences.” These tactics are meant to reduce risk, so they might be deemed a moderate rather than an aggressive approach to portfolio design.


Brackens has become especially risk-averse when it comes to what clients’ holdings will be as they leave employment. “The first five years of retirement are critical,” she says. “We want to make sure that clients have enough cash flow to meet their basic needs, and we want to reduce the risk that a bear market early in retirement will jeopardize that cash flow if they live beyond their life expectancy.”

For risk reduction, Brackens now tends to cut back a bit on market-driven instruments for retirees and place more emphasis on products with guarantees. This can give clients the courage to stick with equities, even in down markets, so they’ll be in a position to benefit if stocks produce excellent long-term returns, as they have in the past. “We want to be sure clients have enough cash set aside in the early years of retirement,” she says, “and we might include some types of annuities.”

In particular, Brackens points to split annuities as a means of generating the necessary cash flow. The term refers to a strategy in which a client invests a sum of dollars that will be split between an immediate annuity, for a number of years, and a deferred annuity. Hypothetically, the investor’s outlay might be split approximately 40-60 between a 10-year immediate annuity and a deferred annuity. The immediate annuity might generate annual cash flow around, say, 5% a year over those 10 years, partially a tax-free return of principal, while the deferred annuity grows to around the amount of the client’s investment, untaxed. If desired, the client can then enter into another similar arrangement.

“The key,” Brackens says, “is to take a hard look at what a client’s cash flow needs will be in retirement, then develop a portfolio attuned to that person’s needs and life goals.”

Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.

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