Each month at Wealth Professional, we focus on a topic we believe to be especially relevant to advisors now. This June, we’re focusing on structured products. When it comes to managing clients’ retirement plans, there’s a lot that financial advisors may want to take from the pension space. Pension plans are managing many of the same core areas of risk: namely the risk that an individual may outlive their savings. They do so with diversification, with discipline, with a long-term strategic view, and with a focus on sustainable income. Those are principles that most retail financial advisors seek to apply in their clients’ individual retirement plans, just as pension funds apply them to group plans. The structured product market offers something of a direct overlap between retail and pension management. These products trade upside potential and liquidity for a defined outcome and capped downside. They promise pension-style risk management in a package that retail advisors can use for clients.
Evan Riddell, a Wealth Advisor, Investment Advisor, Associate Portfolio Manager, and founder of Riddell Wealth Management of Richardson Wealth, specializes in serving a client base of high-net-worth retirees. While he acknowledges that some of the most important risks to control for involve longevity and behavioral mistakes in multi-decade retirements, he explains that the liquidity drawbacks can make these products more challenging. Nevertheless, he applies them in certain circumstances where behavioral management is paramount.
"We’ve used [structured products] selectively in certain client situations over the years," Riddell stated. "And again, it was very situational around either potential for protecting against behavioral issues that the client had self-identified as saying, ‘I’m going to panic out and I can’t take the risk, but I need my money to grow more than what interest in my bank account is going to provide.’" Riddell elaborated, "We needed to find an alternative that’s going to allow them to participate in some upside but have that cap on the downside to make sure that they’re not going to panic out when they’re 70 or 80, when they can’t really have the time to recover."
Addressing Core Retirement Anxieties
Clients rarely approach Riddell seeking a specific product. Instead, they come with a fundamental question that resonates with nearly every individual planning for retirement: "Am I going to be okay?" Riddell’s clients desire the assurance that they can spend their retirement years with confidence, enabling them to pursue travel, spend quality time with family, and focus on a life beyond financial concerns. His role, therefore, is to provide this crucial confidence by meticulously managing the inherent risks associated with long-term financial security.
Riddell posits that the primary risks confronting clients in retirement are not solely market-driven. Instead, he identifies the most significant threats arising from the potential for spending in the early years of retirement to rapidly outpace initial projections. Market volatility, he argues, can also trigger a cascade of anxieties, prompting clients to panic and prematurely exit their investments. Furthermore, portfolios that are not optimized for flexibility can prove detrimental, especially given the unpredictable nature of individual circumstances that can change swiftly.
The demographic shift of Canada’s rapidly aging population presents another significant layer of risk. According to Statistics Canada, life expectancy for Canadians over 65 now exceeds 85 years. This extended lifespan means that clients often navigate the latter half of what Riddell terms the "spending smile." This phase is characterized by increasing healthcare expenses in later retirement, which can rival the lifestyle and travel expenditures enjoyed in the earlier years of retirement.
The Disconnect Between Institutional and Retail Retirement Planning
Despite the substantial overlap in objectives between pension fund management and the aims of retail financial advisors, Riddell points to a critical divergence that often leads him to place less emphasis on structured products in his risk management strategies. Solutions meticulously designed for group pension plans often fail to account for the inherent unpredictability of an individual’s life journey. These institutional products can present liquidity challenges that individuals may find difficult to navigate. "Everyone will say they don’t need the money now until they need the money," Riddell remarked, underscoring the crucial distinction between collective planning and the personalized needs of an individual.
"Many of the outcomes retirees seek from structured products – income stability, downside protection, and peace of mind – can often be achieved through thoughtful planning and disciplined portfolio construction," he added. Nevertheless, there are specific scenarios where Riddell finds value in employing structured products.
Strategic Deployment and Due Diligence in Structured Products
While structured products do not form the bedrock of his investment philosophy, Riddell strategically deploys them for clients who require robust behavioral controls within their portfolios. Clients who desire clearly defined outcomes, acknowledge their own limitations in tolerating risk, and seek strong downside protection can find these products to be a suitable fit. Riddell acknowledges the attractiveness of these benefits, deeming them potentially worthwhile for clients who also possess a clear understanding of the associated liquidity drawbacks. He believes that if the alternative is a portfolio composed solely of cash and Guaranteed Investment Certificates (GICs), then advisors should seriously consider recommending certain structured products.
In making such recommendations, advisors bear the responsibility of meticulously selecting and presenting the appropriate product for each individual client. Riddell’s rigorous assessment of structured products begins with an in-depth evaluation of issuer risk. This crucial step involves ensuring that issuers possess long-standing reputations for reliability and maintain strong financial standings. Following this, he examines the flexibility inherent in a product, paying close attention to any liquidity gates that may restrict client access to funds. Riddell recognizes that unforeseen circumstances can arise, and he places a significant premium on flexibility to address such eventualities. Fundamentally, his objective is to identify products that empower him to reassure his clients that they will achieve financial security throughout a potentially multi-decade retirement.
"It really comes down to what structures we put in place that give clients permission and confidence to spend," Riddell concluded. "It’s the psychological side of retirement. If markets suddenly take a nose dive, what gives clients the confidence to say, ‘I can still take that trip, I can still enjoy my retirement,’ because we’ve taken this thoughtful approach to the plan?" This emphasis on the psychological aspect of retirement planning highlights Riddell’s holistic approach, where financial products are tools to foster confidence and enable clients to fully embrace their post-work lives.
