Should The Elderly Be Less Conservative Investors?

There is a broad approach among investment advisers that as a client becomes older they should be advised to become less risk orientated in their investments. This is partly driven by the thought of “how would I advise my parents?” and partly driven by fear of the Financial Regulator finding fault with an adviser’s investment process.

Indeed in October last year, the Central Bank of Ireland issued a consultancy paper looking for feedback on changes that it was considering making to the Consumer Protection Code. One such change that the regulator proposed was the definition of a “vulnerable consumer”, which it defined as a consumer that is “vulnerable because of mental or physical infirmity, age, circumstances or credulity”.  The attempt by the regulator to define vulnerability is, no doubt, prompted by the many cases of poor financial advice to the elderly on which the Financial Services Ombudsman was asked to adjudicate in recent years.  If the proposed change in wording to the Consumer Protection Code were to be implemented, it would sharpen the focus of financial advisers on how they should interact with many of their clients, including the elderly.

Either way, these are excellent braking measures since we would always want to care for our own kin and therefore why should we treat elderly non-family any different?

By paying increased attention to their vulnerability, however, are investment advisers doing the elderly more harm than good by only just recommending cash or fixed interest options, as most advisers actually do. Is this old style, old age, approach a rather simplistic tactic as many advisers do not want to have to deal with stressed elderly clients worried about the stockmarket roller coaster?

Don’t get me wrong, I am not, for one, recommending a sea change in approach but I do wonder if the financial advisory community has unwittingly become almost condescending to many of its senior citizens or overlooked the need to revise its thinking in line with changed macro economics? By assuming that they will either become too stressed about investment risk or cease to be intelligent when they get into their 60s and onwards, are we removing, in some cases, appropriate investment products for their specific needs in these changing times?

Now I realise that this perspective may be deemed to be investment advice heresy by many of my peers but the fact remains that because someone is elderly doesn’t mean that they have stopped living or does not require a minimum rate of investment return from their investments to meet their future needs. Even a well meaning label by the Financial Regulator shouldn’t remove the need to discuss the full range of investment options rather than, as it seems to happen, start and end with cash-based or fixed interest instruments.

Of course, the rationale of increasing an investment portfolio allocation to less risky, less volatile assets as one gets older seems quite understandable, even if you leave aside the emotional issues. As individuals edge towards being immediately pre-retirement investors only to become post-retirement investors, their ability to earn their way out of a stock market fall diminishes considerably, as does their ability to outlive the long term effects of a market decline.

But is this approach possibly dangerous advice?

From an investment management point of view, the traditional approach of reduced risk has much to do with the historic perspective of locking in guaranteed rates from Government Bonds. Of course, on an historic basis, such lock-ins then were far more attractive than they are now as, in the past, interbank interest rates were 4 or 5 times current levels and it made sense not just to be conservative but also very sensible. Why wouldn’t one lock in high interest rates if one had the option, especially if inflation was likely to fall into the future, which it did!

The major personal difference between now and, say, 30 years ago is that life expectancy, through better health services, has extended the need for income and, in some cases, capital. On the financial side, interest rates are now far lower than they were in the distant past.

It is all very well to say that as a person moves into the last chapter or two of their life that they have fewer expense needs as their lifestyle slows down and their mortgage is paid off. Ask anyone, however, who is either elderly or has an elderly relative if they would have anticipated 15 years ago how much money an 80 year old retiree might need, especially with regard to healthcare. This has not been helped by the Government’s announcement last week of the effective future curtailment of the Fair Deal Scheme for nursing home care. For those unable to get government financial support in such circumstances at such a vulnerable time of their life, the burden of financial care may be untenable.

And just in case readers of this article think that it can’t be that bad, just do the maths!  The average cost of nursing home care is €1,200 per week or €62,400 per annum. Pay this fee for, say, 4 years and you realise that a need for €249,600 can easily occur. This is a massive sum. If the Fair Deal scheme is closed to future participants or even to a lower number of participants, then someone somewhere will be expending quite a considerable amount of funds if they want to make sure that either they or an elderly relative will be properly cared for in the twilight of their life.

There is no doubt that returns are correlated with risk, and that equities are more risky and volatile than bonds over most periods. But as long as your time horizon is 10 years or longer the risk in owning stocks seems to be overdone especially if one has a broad-based diversified portfolio. Even over the last 10 years, with all the market crashes and uncertainty, returns on equities were essentially flat. And that is a bad period! The question is, I suppose, what is the possible return over the coming 10 years?

Just because someone is 60 or 65 doesn’t mean that they need to go to cash immediately even if they are risk-averse. The higher cost of long term care means that it probably doesn’t become a serious issue until age 70 to 75 and onwards. This means that in many cases, some level of investment risk could still be considered over the intervening period, providing that the risk is spread broadly over a wide range of assets.

The historical option of buying Irish Government stock is no longer the safe bet that we had previously thought and it would be a very brave adviser who might recommend a large holding of such bonds. The current high yields attaching to Irish government stock is the stockmarket’s way of recognizing the high risk that such bonds hold and so are possibly not ideal for any investor of any age other than those prepared to take serious risk.

Equities, for their part, require far more growth now than they have priced in which is stretching their valuations. This being said, time in markets usually produces results. Even moderate exposures to equities can make substantial differences to portfolios relative to cash only holdings.

Of course conservatism is necessary for those who are naturally risk-averse irrespective of their stage in life. But ignoring an investment return needed to maintain a portfolio is like throwing the baby out with the bathwater. Riskless investors face a difficult dilemma with risk-free returns currently so low. Probably the best solution is to never be in this plight in the first place, by undertaking adequate saving and reasoned investing from a young age.

No matter how old a person is, any investment planning needs to start with an investor’s net financial worth before balancing expected investment returns with expected income and capital needs. This is as applicable to a 65 year old as it is to a 25 year old. Risk tolerance rather than just risk propensity is also a key consideration in relation to the range of possible investment returns.

In any event, my belief is that the automated old age / low risk approach needs to be revisited by many investment advisers to reflect not only the different personal circumstances of their elderly clients but also the changed economic environment we now live in. To do otherwise may be doing such clients a disservice.