What's the future of retirement? Advisers break down 'non-traditional' assets
Investing in retirement isn't limited to just traditional 401(k)s anymore. But more options can also lead to more consumer confusion — leaving advisers with their work cut out for them.
From digital currencies and sustainable target-date funds to annuities and even art-as-investment, the demand for diversification is at a notable high. According to the 2022 Investopedia Financial Literacy Survey, about one-third of employee investors under the age of 55 plan to rely on cryptocurrency during retirement. Sixty-nine percent of employees said they would or might increase their overall retirement contribution rate if environmental, social and governance (ESG) options were offered, according to the Schroders 2021 U.S. Retirement Survey.
"People are taking their own investment philosophies into account and making their own decisions for an experience that's unique," says Ryan O'Toole, an investment manager and adviser at Sequoia Consulting Group. "It's different from what's been done in the past, where they've been relying on investment managers and the investment options that they provide."
Before discussing non-traditional retirement assets, it's important to first take into account that the definition of "non-traditional" has evolved over time, according to Michael Bass, an accredited investment fiduciary and one of the founders of Wealth Advisory Group. In the past, more radical investments would have meant assets that were non-equity, stock or bond-based, which was limited to things like real estate, for example, compared to today, when real estate is considered to be one of the most common forms of investments. That is a prime example of the cyclical nature of the retirement industry, according to Bass. And it gives some insight on where in the revolution they find themselves now.
"We've had a lot of volatility in the markets over the last 18 to 24 months," he says. "Prior to that we had 10 years of linear growth in the stock market where asset class mattered, but it seemed like every asset class was moving in a linear exponential fashion upward. That's not necessarily the case today. Asset class matters again. It's full circle."
How does this shift really gel with what the financial services industry offers? Despite their clients' new interests beyond a standard retirement account, the adviser's role has stayed more or less the same, according to O'Toole — and that's to make investing as simple as possible.
"You want to give them enough choices that they can create a diversified lineup without giving them choice overload, which can cause confusion for participants selecting between different investment types," O'Toole says. "That's where we, as advisers, have to try and help with education and basically give them a breakdown."
The assets currently getting the most attention from clients, he says, are ESG investment options and cryptocurrency. Demand for more environmentally sustainable options in employee retirement plans has been steadily increasing, and the professionals are listening: Roughly 89% of investors considered ESG issues in some form as part of their investment approach in 2022, up from 84% in 2021, according to a recent study from Capital Group.
"ESG is probably the most prominent and trendiest topic within 401(k) plans," O'Toole says. "There's not necessarily a one-size-fits-all approach with ESG, and that's the difficulty with picking different managers, because not all of them have the same kind of screening methodology out there."
Fund managers will take one of three approaches to ESG, according to O'Toole. The most common is to simply look at individual ESG factors within a fund and make selections based on those factors, but without being exclusionary to other funds. The second is to employ ESG-focused strategies, which means choosing funds that have an ESG mandate, or excluding funds that don't meet a certain ESG criteria. The last is an ESG impact strategy, which means only investing in funds that have a stated ESG goal to make a positive impact within the environmental, social or governance spaces.
"ESG has unfortunately gotten pretty politicized recently. The risks associated with companies that score poorly on ESG metrics are very real, and they can impact performance of investments," O'Toole says. "But then on the other side, it's kind of a balancing act, because there's also some real pitfalls of being extremely rigid in ESG approach. One of the most important parts when you're saving for retirement is diversification to reduce risk. If an ESG investment is really exclusionary, the fund can miss out on entire segments of the market."
As for crypto, consumer interest has exploded since Bitcoin, the first cryptocurrency, was launched in 2009. Today, over 44% of Americans with retirement savings have invested in cryptocurrency, according to FinanceBuzz. Embracing digital currency for retirement investment purposes is a trend that is relatively new — and saw a particular spike over the course of the COVID-19 pandemic.
"The returns [were so exponential] that every investor felt like it was the new gold rush," Bass says. "We were certainly having many conversations with our individual clientele about adding crypto to the portfolio, but we've always felt that it's incredibly volatile and completely lacks any and all governance. It's just not a place where we're comfortable deploying client assets."
Still, Bass doesn't consider his firm to be "allergic" to crypto, especially as today's tech revolution will likely push digital currencies to become more prominent as the years go by. But for the time being, Bass and his team at Wealth Advisory Group are focused on simply helping clients understand the landscape of the retirement industry in the face of changing and growing demands.
"We want to have deep discussions with our clientele at an institution or an individual level so they understand the various asset classes that are available to them," he says. "It's important they know what it means to diversify their portfolio and understand the risks of each of those asset classes and how they work in tandem with one another."
In the end, the things that seem new and frightening to this space will one day be old hat, according to Bass. Advisers and clients just need to take it slow and prioritize the journey, not instant gratification.
"Asset management is a process, not an event," Bass says. "We live in a society where the appetite for longevity is not there, meaning they want the quick fix and there's really just no such thing.The truth is that you pick an asset allocation, and then you continue to monitor and tweak and reevaluate on ongoing basis so that you achieve your common goals over time."