Ever since Harry Markowitz won the Nobel Prize for his work in Modern Portfolio Theory, the financial services industry has advocated the concept of asset allocation as the critical component of a successful investment strategy. But now, a recent paper by the Center for Retirement Research at Boston College suggests that in terms of actually being able to maintain one’s lifestyle in retirement, compared to other factors, the focus on asset allocation is largely misplaced.
The paper, “How Important is Asset Allocation to Financial Security in Retirement?”, examines four variables – working longer, spending less, reverse mortgages and asset allocation – to determine the impact each has on an individual’s ability to maintain their consumption throughout retirement. Their conclusion? The impact of asset allocation is overrated.
To understand how the authors came to this conclusion, we have to recognize that they are talking about the average 55-64 year old American who, according to the latest Survey of Consumer Finances (2010), has a median net worth of just over $179,000. Recognizing that a sizeable percentage of that net worth is likely tied up in one’s home, that leaves very little left over for any investment strategy to be truly impactful. Clearly in this case (which is obviously all too common) the other variables will have more impact.
Where I would disagree with the authors is in their assertion that asset allocation has little impact on more affluent clients. Regardless of our feelings on the over-consumptive nature of our society, maintaining one’s spending without cutting back, preserving home equity for future generations or creating the emotional freedom to choose whether to leave or stay in a job, has tremendous value to our affluent clients.
But rather than argue their conclusions, perhaps the most valuable message we as an industry should take away from this paper is continued guidance on the direction of our industry. With the majority of financial service professionals paid one way or another based on assets, it stands to reason that the solutions we develop and the expertise we acquire will be directed at solving the problems of those clients with assets. This paper shines a glaring spotlight on the fact that the larger market has needs for which we have limited solutions and expertise. As an industry, we need to expand our expertise to find more and better ways to help those without assets achieve a comfortable and satisfying retirement.
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