A New York City-based financial and economic consulting firm is launching a new product designed to protect investors from downside market risk.
Data Science Partners has created Downside Risk Protection for advisors, institutions and retirement plan providers, who in turn can offer it to their clients, says Alexander Rinaudo, CEO of Data Science Partners.
The product acts like an insurance policy that protects investors’ funds and increases their chance of not outliving their retirement money, Rinaudo says.
Applied to an all-equity portfolio, Downside Risk Protection caps investor losses at a maximum of 15 percent on an annual basis in the years that the retirement accounts sustain losses. Anything more than a 15 percent loss is made up by the institution offering the Downside Risk Protection.
On the other hand, in the years when an all-equities account posts a gain, the account holder gives up 10 percent of the gain to the financial institution offering downside risk protection for the account. Financial institutions can use the plan with any equities or fixed-income portfolio, with the downside floor and upside payment varying for different asset mixes.
Research for Data Science Partners shows that the likelihood individuals outliving their assets over a retirement period of 45 years drops from nearly 15 percent to 4 percent with the protection, Rinaudo says. This approach also increases the portfolio’s average returns while decreasing portfolio volatility, he says.
The protection is different from an annuity, which provides lifetime income and some protection from market volatility, in that it does not require an upfront purchase price, but instead is pay-as-you go. It can be added to any account.
“This product can help create stickiness of assets for the financial planner or retirement plan provider who offers it,” Rinaudo says. “In a world where advisors are subject to fee compression, this provides an alternative to annuities. We believe there is a psychological, as well as an economic, benefit that advisors and institutions can offer with the protection.”
“The idea for Downside Risk Protection was created because the majority of today’s retirement accounts -- 401(k)s, IRAs and other self-directed plans -- are highly susceptible to major downward moves in markets,” Rinaudo says. “Unlike pension plans, which provide steady retirement income but are rapidly disappearing as a retirement savings plan option, self-directed plans leave retirees exposed to the risk of outliving their assets. Individuals face the risk of a self-directed plan’s uncertain income stream.”
The research and additional information on the plan can be found here.