How Does Brexit Impact RMA® Graduates and Their Clients?

Brexit, and its impact on the markets, show the value of using Risk Capacity from the perspective of the RIIA® Household Balance Sheet View℠ to manage the risky assets portfolio (the Upside portfolio) in a  retirement plan because wild changes in the markets do not affect the central expectation of retirement income in the Floor portfolio.

Instead of fearing long-term income impairment due to a current down market, the client invested on the basis of risk capacity wonders if this is a buying opportunity.

How can we show this to you?

Brexit provides us with an opportunity to compare and contrast letters sent to clients by different advisers. Some are alert for buying opportunities. Others send “don’t sell” messages.

For instance, in a client note sent by Michael Lonier, RMA® to his clients on Friday:  “This Upside amount we can invest and expose to market risk for long-term growth (because) expenses are covered by Floor and Reserves allocations, not Upside. Losses do not need to be realized. I can use value averaging to buy more Upside when the markets decline, at a lower cost, which significantly improves growth over time.”

Contrast this with messages where clients are told they should be patient and sensible about their allocations to risky assets, they need to focus on the bigger picture, they must resist fear and take risks to meet their goals, etc.

Brexit also provides an opportunity to show related aspects of the RMA Curriculum. For example, how do you differentiate various risk definitions, i.e. risk perception, exposure, tolerance, profile, aversion, etc. versus the Risk Capacity definition?

Risk Capacity has a clear and quantitative definition which starts with:  “Risk capacity is a measured accounting value, expressed in dollars. It derives from the Household Balance Sheet Analysis℠ and it is the difference between the assets and the liabilities.”  Note that it is the difference between the net present values of the assets and the liabilities. The definition ends with: “Some or all of this [risk capacity] can be exposed to risky assets and therefore invested as [the] “upside” [portfolio].”

To learn more: sign-up for the next RMA Online Class at SSU and/or join us for the Summer Conference in Salem.

Post a Comment