Ep 407: Building Retirement Portfolios With A Liability-Driven-Investing Approach To Manage Sequence Of Return Risk with Mark Asaro
Oct 15, 2024
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Mark Asaro, Chief Investment Officer of Noble Wealth Management, shares his expertise in liability-driven investing (LDI) for retirement portfolios. He discusses how LDI can help navigate sequence of return risk by matching retirement portfolios to clients' spending needs. Mark emphasizes the importance of using closed-end bond funds for income stability and adapting portfolios based on market conditions. He reflects on his firm's strategic adjustments during the 2022 downturn and redefines success in financial advising, prioritizing client well-being and financial stability.
Mark Asaro's liability-driven investing strategy aligns portfolio cash flows with client spending needs, crucially managing sequence of return risk for retirees.
The tactical rebalancing approach employed by Asaro takes advantage of market conditions, optimizing asset allocation between equities and fixed income for enhanced financial stability.
Understanding clients' psychological barriers in financial planning is essential, promoting peace of mind and encouraging informed spending decisions during retirement.
Deep dives
Liability-Driven Investing Explained
Liability-driven investing (LDI) is a strategy focused on aligning a portfolio's cash flow with a client's specific financial liabilities, particularly during retirement. This approach emphasizes understanding clients' future spending needs and tailoring asset allocations to generate sufficient income to cover those expenses. By ensuring that income matches liabilities, LDI mitigates sequence of returns risk, which is crucial for retirees who may need to withdraw funds during market downturns. This investment methodology is particularly beneficial for risk-averse clients, enabling them to feel secure about meeting their financial obligations without needing to sell assets during unfavorable market conditions.
Portfolio Construction Using LDI
Mark Asaro employs a systematic approach to construct retirement portfolios by focusing on fixed income and utilizing closed-end bond funds. This involves building a 'bond tent' that ensures enough income is generated during the early stages of retirement while also mitigating inflation risk with equity components for later years. The approach allows for dynamic reallocations between equities and fixed income, replenishing asset allocations as needed or capitalizing on market downturns to take advantage of lower equity prices. This structured methodology not only supports clients' spending needs but also encourages them to confidently tap into their retirement savings, enhancing their financial comfort during retirement.
Attracting and Managing Risk-Averse Clients
Asaro has successfully attracted a client base that tends to be more risk-averse, often former business owners who are apprehensive about losing their wealth. This demographic typically prefers LDI strategies because they provide clarity and assurance about meeting their financial goals without unexpected fluctuations. The structured nature of LDI enables clients to understand how and when they can spend their money in retirement without the fear of market losses impacting their lifestyle. This approach helps build trust and rapport with clients, encouraging them to spend more freely while feeling secure about their financial future.
Navigating Market Challenges and Transitioning to Independence
The transition from an insurance brokerage to an independent registered investment advisor (RIA) was a significant challenge for Asaro and his firm, coinciding with a downturn in both bond and equity markets. This transition required strategic thinking and careful management to retain clients and adapt to new market conditions. Utilization of individual bonds became a core strategy once the interest rates increased, providing a fresh opportunity for improved yields that clients had not seen for years. Adapting quickly to market fluctuations and recognizing the advantages during challenging times has strengthened the firm's resilience and client relationships.
Emphasizing Behavioral Finance and the Client Experience
Asaro highlights the importance of behavioral finance in the financial advisory process, emphasizing that understanding clients' psychological barriers is as crucial as managing their portfolios. This perspective helps in developing strategies that not only focus on financial objectives but also promote peace of mind among clients. He advocates for educating new advisors to appreciate market dynamics deeply, encouraging a comprehensive understanding of client needs that goes beyond basic financial education. By applying this knowledge, advisors can create tailored solutions that resonate with clients' experiences, helping them navigate their financial journeys with confidence and clarity.
Mark Asaro is the Chief Investment Officer of Noble Wealth Management, an RIA based out of Colorado that oversees $320 million in assets under management for 160 households. Mark stands out with his liability-driven investing approach, which builds retirement portfolios focused on managing sequence of return risk, leveraging the use of closed-end bond funds to generate income to cover client expenses during the critical early retirement years.
Listen in as Mark shares how Liability-Driven Investing (LDI) matches retirement portfolios to client spending needs, securing early retirement finances through strategically allocated fixed income to generate income and equity to manage inflation risk. He dives into his tactical approach to rebalancing portfolios, using market conditions to optimize asset allocations between equities and bonds. Mark also reflects on his firm's strategic shift during the 2022 market downturn, when it capitalized on high bond yields, why he believes investment management isn't a commodity, and how the LDI approach ultimately supports clients' long-term financial stability and peace of mind.
