Balasa has a point. The essence of portfolio management is managing risk, not return. If you add 2% of MLPs to a portfolio and they do well it adds a few basis points to total return. When MLPs perform like they have in the last 18 months, it subtracts a lot more than 0.1%.

U.S. equity outperformance is another topic that is driving client conversations to places advisors would prefer not to go as individuals question the value of diversification. A case in point—one advisor reports that a client recently asked what his portfolio would be worth today if his entire equity allocation had been invested in the S&P 500 since 2009. Hindsight is easy.

But it’s the paltry yields in safe sectors of the fixed-income markets that are prompting multiple outside-the-box ideas. Last year in this magazine, Pfau floated the idea of replacing bonds with immediate income annuities, or actuarial annuities as he called them.

Income annuities can provide longevity protection in a way that bonds can’t, even though rates are low for annuity buyers. Here timing matters. If purchased when a client is near 70, mortality credits start to work in the purchaser’s favor. Some advisors are willing to use them for a part of their clients’ bond allocation, but few would be likely to substitute them for virtually all of the fixed-income portfolio. Moreover, many clients are unlikely to cede control over a major chunk of their nest egg. 

An alternative, particularly for affluent clients, is to create a laddered portfolio of bonds. This remains a viable option, one that clients seem to like. But an unanticipated consequence of the anemic interest rate conundrum is that the bonds of many blue-chip companies are yielding the same or less than their dividends, a phenomenon not seen since the 1950s. Needless to say, bonds have no prospects for any increase in coupon rate.

That’s part of the reason the Wells Fargo Investment Institute recently produced a paper urging retirees and advisors to consider larger allocations to equities, achieving more portfolio growth to fund longevity and future income. For Tracie McMillion, who heads global asset allocation for the institute, retirement income can be best managed through smart asset placement, putting stable assets generating the most income in tax-free retirement accounts.

“If people want to hold bonds, hold them [mostly] in qualified plans,” McMillion says. “That’s a way to minimize taxes,” since dividends and capital gains are taxed at lower rates. 

Many advisors have deployed this strategy, and it can work well as a predictable income substitute for people without pensions. Still, problems can arise when a client’s assets are top heavy with qualified plans, as many physicians’ assets frequently are.

Some advisors, like Kitces, believe the point of entry into equities, particularly at today’s levels, is important (in contrast to those who believe that over a 25- or 30-year retirement, the cost a client paid becomes less consequential with time). The Shiller CAPE ratio sits in the top 20% of historical levels, signaling to Kitces that investors should expect lower future returns. 

“With stocks at elevated valuations, a potential market crash can knock 25% to 45% of the equity portion of the portfolio,” he maintains. “Saying I’m afraid to buy bonds yielding 2%, I’d rather buy stocks that can lose 45% is a terrible strategy.”  

The correct answers are obvious and easy. People should spend less and work longer. But to clients paying thousands every year in fees, they sound like tough love.

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