While clients fret about risk, it’s really uncertainty and regret that they’re worried about. They’re not sure what to do — and they certainly don’t want to be looking back 15 years from now and cataloguing their mistakes.

As a result, many advisors are wrestling with the challenge of creating income-producing portfolios for risk-averse clients, particularly older people, in what remains a low interest rate environment — without clients’ income being eaten up by inflation. The manufacturing side of the industry, too, has recognized these fears and responded with a flood of “safety first” products intended to help advisors meet clients’ needs.

There are several product categories that may suit your clients.

> Life-Cycle Or Target-Date Funds. One solution may be life-cycle or target-date funds such as Toronto-based Fidelity Investments Canada ULC’s ClearPath or Toronto-based IA Clarington Investments Inc. ’s Target Click series, which automatically shuffle their assets to become more conservative over time. Some advisors like the turnkey features these funds provide — a predetermined asset allocation based on the client’s desired risk tolerance or expected retirement date — because it gives them time to focus on other areas of their practice beyond managing investments. But others question their costs and their “commoditization” effect on the industry.

“I can see cautious, self-directed investors going this route,” says Graeme Baird, an advisor with G.R. Baird Financial Group Inc. in Ottawa. “But, then, they really aren’t looking for advice to begin with.”

Over the years, his practice has developed from being mostly insurance sales to a much more balanced mix of protection and money products. And the personal relationship he has forged with these clients has been a constant throughout.

“Costs aside, I think you lose something with this sort of prepackaged product,” he adds. “These asset-mix discussions are a key part of our client relationships.”

With their assets-in-a-box approach, life-cycle funds are meant to be stand-alone investments. Too much diversification outside of the packaged portfolio can muddy the allocation picture for clients and their advisors.

“Be sure you can track all the client’s assets,” says Adrian Mastracci, an advisor at KCM Wealth Man-agement Inc. in Vancouver. “Otherwise, you have to deal with a lot of redundancy that can skew the appropriate allocation mix for your clients’ age.”

> Principal-Protected Notes. Principal-protected notes are another popular option for conservative investors. In theory, they provide nervous clients with both peace of mind and a shot at returns that can exceed those of GICs or other fixed-income options.

PPNs may be marketed as “linked notes” or “return notes,” but, whatever the label, these two-tiered products are not always understood. One portion contains a guarantee promising a return of principal after a set period of time, as long as 10 years, depending on the issuer. The second is an investment linked to a basket of stocks, a particular market index or a fund, which offers the potential — but not the guarantee — of a profit.

The cost of the guarantee involves additional fees, which can shave the returns clients would make by investing directly in the assets. And this is where some advisors balk.

“There’s really nothing here that many advisors can’t do themselves at a lower price,” Mastracci says. “All you need is a strip-bond backing your fund purchases.”

The bigger question, he maintains, is why uneasy investors are looking for this protection.

Most PPNs have terms of five to seven years, some run even longer. If you look at the historical data, Mastracci says, there are very few five- to seven-year periods in which the markets didn’t provide a positive return. “So, exactly what downside are these clients protecting themselves against?” he asks.

Finally, Mastracci believes the concept of principal protection sounds better than it is: “If all clients are getting back in seven years is their capital, they have to realize inflation will have put a real dent in their purchasing power.”

Hybrid products such as PPNs are a compromise, says Francis D’Andrade, an advisor with RGI Financial in Markham, Ont., and author of Am I Going to be OK? Achieving financial comfort in today’s world. “For affluent clients, they are a way to preserve and build wealth without taking on excess risk,” he says. But many offerings are complex, he cautions, and he urges advisors to be “selective” and do their due diligence.

@page_break@To that end, the Investment Dealers Association of Canada recently published a guidance document aimed at helping advisors determine PPNs’ suitability for clients. The report, written by industry consultant André Fok Kam, details how PPNs work and how to evaluate them and their fees, guarantees and the taxes they generate.

> Guaranteed Minimum Withdrawal Benefit Products. Some clients, possibly facing as much time in retirement as they spent in their careers, are looking further out still. Their biggest fear: outliving their money because their investments performed poorly.

A recent study by McKinsey & Co. of Montreal found investors of all incomes worry about a range of retirement risks, including inflation, health expenses, market risk and a lack of guaranteed income. Women, in particular, scored much higher than men when it came to anxiety about all retirement risks.

Enter guaranteed minimum withdrawal benefit products such as Waterloo, Ont.-based Manulife Financial Corp. ’s IncomePlus and Toronto-based Sun Life Financial Inc. ’s SunWise Elite Plus. These products are segregated funds that also offer guaranteed protection of principal over a fixed time period. Usually, that translates into a fixed income of 5% of the initial investment annually over 20 years.

For example, clients investing $200,000 would be guaranteed $10,000 a year for 20 years, regardless of the performance of the underlying funds. If stock markets rise, clients can lock in gains with a “reset” feature that raises the guaranteed threshold, assuming the market value is higher than the current guarantee value. Often, these occur automatically every few years on the anniversary date.

If clients leave their money untouched during the initial period, they can boost their annual withdrawal rate, up to certain limits. In some instances, they can also opt for a rider that ensures the death benefit also increases over time, regardless of investment performance. This may be an attractive option for those seeking to maximize payouts to their beneficiaries.

The development of these products is based on the premise that older investors are more likely to be vulnerable to market downturns as they enter what Moshe Milevsky, professor of finance at York University in Toronto, has labelled the “retirement risk zone” — namely, the period just before or after they retire. Weak market performance could erode the value of their retirement portfolios during this critical period, leaving them without sufficient time to recover their losses.

These guaranteed benefits come at a price, however. Fees, which are over and above the underlying funds’ management expense ratios, range between 0.25%-0.35% for fixed-income and lower-risk funds and 0.55%-0.75% for more aggressive growth funds.

Nonetheless, over the past year, Manulife’s IncomePlus sales have passed the $2-billion milestone. “We couldn’t have predicted this much early success,” says Roy Firth, Manulife’s executive vice president. “The popularity of these products with Canadians speaks to the current mindset of today’s boomers. They want protection when markets are volatile and growth when markets are strong.”

Adds Andy Glavac, a principal with Glavac Financial Services in Welland, Ont.: “There’s a lot of interest in this line of business, particularly from more conservative clients. It appeals to those who feel optimistic about their life expectancy but less confident about their ability to manage it.”

But while these products protect clients’ nest-eggs, it’s important to realize that many people will be retired for much longer than two decades. “That’s been a concern for us,” Glavac says.

It appears he is not alone. Reacting to advisor comments similar to Glavac’s, Manulife recently extended its guarantee, with no increase in fees, to the lifetime of the investor, starting after he or she turns 65.

These sorts of guaranteed products can work for many older, risk-averse clients. And, in the case of GMWB offerings, at least, says D’Andrade: “The insurance costs aren’t unreasonable when you look at the time frame.” IE