James Rockwood [00:00:01] This is the frontier of Finance, the podcast that covers the hottest new funds and important milestones of marquee funds in Canada. On the frontier, we go directly to the source interviewing portfolio managers, executives and sales leaders at the top asset management firms. Stay on top of the latest innovations, react to market trends and make better investment decisions for your clients. I'm your host, James Rockwood, and I'm welcoming you to the Frontier of Finance. This generation of investors knows to expect market volatility. The Great Recession and COVID 19 are two generational events that have occurred in the past 15 years. While volatility is unavoidable. People hate losing money and during volatile times, making rash calls on your investments can derail wealth plans. On today's episode, we're looking at long term strategies that help defend against extreme market swings. I'm joined by Ian Filderman, vice president of product development for Wealth Solutions at Canada Life. Ian has an impressive track record of setting wealth managers up for global success. He has held leadership roles for a number of the largest banks and insurance firms in Canada, including RBC, Manulife and Scotiabank. Ian, thank you for taking the time to join us today on the frontier.   

Ian Filderman [00:01:29] It's a pleasure to be here.   

James Rockwood [00:01:33] I would say it's not a revelation for me to say that markets are getting increasingly volatile. What trends are you seeing in response to this increased volatility?   

Ian Filderman [00:01:44] Yeah, it is a fascinating time to be either an investor or an advisor given all of the changes in the market – the daily volatility, meme stocks, bitcoin and all kinds of things that carry incredible volatility with them. Not to mention just the normal volatility or sometimes heightened volatility that can go with the equity and fixed income markets more traditionally. You know, it's a challenge if an advisor’s key role, in so many ways, is to really help to understand their client’s needs: what those goals are, objectives, their tolerance for risk, their need for income, many other factors and pull that together. It becomes that much more challenging in an environment like this. And you know, one of the trends that we're seeing really is this development of solutions, if you will, for lack of a better phrase, but outcome-oriented solutions. So starting to see a shift away from just finding an investment strategy, a fund, an ETF that's going to perform well or exceed its benchmark and really looking for crafted and tailored solutions to solve specific investment problems for those clients and the advisors that they work with.   

James Rockwood [00:03:03] I'd be interested to know how this increased volatility is affecting Canadians that are, let's say, near retirement, where the margin for error is potentially smaller or where there is more sensitivity to specific returns and the time is less on your side. So you have less time, for example, to make up a drop or make up a loss in a market before you need the money.  

Ian Filderman [00:03:29] When you're in your accumulation phase and when advisors have clients in that accumulation phase, time really is their friend. You know, the longer that you can invest for, the more you can withstand that volatility. And frankly, through techniques that you know, most advisors know, and certainly many try to put in place with clients with dollar cost averaging, you can turn that volatility to your advantage buying more units in a fund when prices are lower, buying fewer when prices are higher and averaging that out over time. So you turn volatility to your favor. You're absolutely right that as you get closer to retirement, some of those elements start to change. And you know, some of the some of this is psychological and this affects everybody, but particularly so as you're approaching retirement. We know that investors feel losses significantly more than they do equivalent gains. Fancy term for it is loss aversion. And you know, that's something that behaviorally can affect many investors and lots of advisors working with those investors are certainly spending lots of time talking about that and what those emotional cues are around market volatility and helping to avoid the temptation to buy high and sell low rather than what we know actually works over time, which is buying low and selling high. The other part to this, though, is that as you approach retirement and particularly as you get into retirement and you start drawing down on your capital, you end up with something called sequencing risk. And it's a brand-new risk that nobody really talks about when you're in accumulation phase. But the sequencing risk is, you know, when a particular bout of volatility might hit your portfolio, having that happen earlier in your retirement period rather than later can have an outsized impact. And in addition, that volatility and sequencing risk can also affect you as you're drawing down your portfolio. So where on the way up as you're putting money away on a regular basis and like we were talking about a moment ago where you're buying more units when prices are low and fewer units where prices are high. It's kind of the opposite effect when you're drawing it down. All of that speaks to really an enhanced need to focus on managing and controlling volatility. Risk and return are two sides of the same coin. And, you know, unfortunately, there needs to be some risk that goes with this. The question and you know what, many of us in the industry are trying to solve increasingly is how do we manage that volatility better? We can't necessarily eliminate it without eliminating the returns that we're trying to achieve, and especially as Canadians live longer, some, perhaps 30 plus years in retirement, they need to stretch their investments for longer periods of time that, in many cases, may suggest a need for some level of capital markets or equity exposure. But within that, how do you continue to stay invested with an appropriate portfolio and manage that volatility in a unique way at this point in investors’ life cycles?   

James Rockwood [00:06:48] Just wanted to double click quickly on the sequencing risks, you mentioned that part of sequencing risk, if you have a market event earlier in retirement versus later, it can have an outsized impact. Can you just provide an example really quickly?   

Ian Filderman [00:07:01] Let's think about it this way. There's really two components to sequencing risk. There's the timing of withdrawals and order of returns. Negative returns early in retirement when you've just started withdrawing money can cause the portfolio to fall faster. So if you're taking out a certain amount of money per month, it's kind of the opposite of dollar cost averaging that we were talking about before. So if the price drops, it actually takes more units on the withdrawal to make that same dollar amount of withdrawal. And if prices are higher, it takes fewer units on the withdrawal to get that same amount of capital. Again, it's kind of the flip side of what happens when you're in accumulation phase and you see some market volatility. So what happens is if that happens in particular early on in the sequence and you have a significant downside risk event, then that's going to just make stretching those dollars that remain that much more difficult because of this sequencing risk that occurs and because of the way it's again, just kind of basic math, the way it works of withdrawing a certain amount a month to fund retirement lifestyle and how many units it's going to take to actually make that work and get the appropriate amount of cash in an investor's hands.   

James Rockwood [00:08:20] Right, that makes perfect sense. I appreciate that. I think it's really interesting and I feel like although retirement has always been a focus and a complex part of financial advice and wealth management, now we're going into a phase where there's the boomers are retiring. This is becoming a way more prevalent situation that all advisors are going to have to face. And as you do it at the scale that it's going to occur plus with now the new information, the new technology, much more efficient markets and much more efficient access to financial information than we've ever had. We're going to start to learn a lot more about what happens in retirement, what we have to do. So talking about new types of risk, talking about things like sequencing, I think is really, really important. And we know that Canada Life launched the Canada Life Risk Managed Portfolios in November last year, so they're almost a year old. Can you give us a really brief overview of them?   

Ian Filderman [00:09:15] Sure, and I'll try and keep it brief and should preface this by saying, you know, we're talking about the funds and a solution. And for anybody listening at Canada Life, we believe strongly in the value of financial advice and working with an advisor and would certainly strongly encourage investors to do that, but also to make sure to say that as we're talking about this, it may or may not be appropriate for anybody listening. And it really is important to do your homework if you're looking at this as an investor or to work with an advisor who can help see if this or any other solution or investment is actually appropriate for you. So that said, we launched the Canada Life Risk Managed Portfolios as you said about a year ago, and they are really designed to be engineered with a risk aware approach while still providing investment growth potential over time. It's a series of three portfolios they're offered in both mutual fund and segregated fund formats. So, for whatever way investors and advisors work together, they are available in both of those formats. And they were really designed to help grow savings in a much more stable way and help investors really to do that without having to stay up at night, worrying too much about the swings in the value of their investment. It's done through robust diversification, exposure to thoughtfully selected lower volatility, equity strategies, alternative asset classes and using some more sophisticated specialized risk management strategies. So, the unique nature of these portfolios is that they really go beyond traditional diversification that's typically found within many balanced funds, and that really is the key. Balanced funds do a fantastic job of managing risk and reward. These are really designed because the outcome that we're focused on is managing that downside volatility. Managing that excess volatility over time really focused on going that next step beyond traditional diversification, by asset class, by security to manage those particular risks.   

James Rockwood [00:11:26] And then will the RMP portfolios behave differently from traditional balance funds or I’d like to know a bit more about managing the downside.   

Ian Filderman [00:11:36] We were talking before about, you know, risk and reward are, you know, two sides of the same coin and they really do go together. The whole idea with these is that they are intended to provide exposure over time, still provide the ability to grow, but to really manage some of that downside risk a little bit better than perhaps a traditional balanced fund might. It's about making the portfolios more resilient, I suppose, in the type of challenging environment that we've got. And if you think about that environment, you've got, you know, central banks telegraphing rates that are going to continue to be low for a while, even if they're starting to take monetary stimulus out. Even if we could see some short-term rate rises. Historically, still going to be quite low. Geopolitical tensions, heightened volatility - like lots of things that are really playing into what's going on and diversified multi-asset class portfolios are really a great way to start to manage that volatility. You know, I think the idea here is, again, let's see if we can focus on some enhanced risk management techniques and try to reduce - it's not always possible - but try to reduce some of that excess volatility and differentiate them that way. It is not going to be for every investor, you know, particularly those that are looking for more significant growth potential. You know, this may not be a solution for that advisor or that that investor and again, harkening back. Everybody's got to do what ultimately is going to align with their own objectives. But we do think that this is something where we can provide robust diversification and make it a core component of or a component of an overall portfolio to manage risk and volatility for investors.   

James Rockwood [00:13:29] And you mentioned that these were outcome-oriented portfolios. Can you describe a bit about what that outcome is? Is it a target rate? Is it a specific outcome?   

Ian Filderman [00:13:40] You're right. Outcome oriented could mean a lot of different things to a lot of different people. You know, to be clear, what this isn't is a portfolio that's just designed to say, “Hey, let's go, beat the market and find the best investments that are going to go do that.” The outcome that these were really designed with in mind was to try and be able to manage risk while provide some of that investment growth potential that goes with a particular asset mix.   

James Rockwood [00:14:09] And I know we spoke a lot about sequencing risk, retirement, the importance of managing the downside as you approach retirement and or in retirement and are in that decumulation phase. Is that primarily who, if I'm an advisor and I'm considering my client base, who I'm going to want to try to target for, is it that plus people who just have a particularly acute loss aversion? How am I going to think about, if I'm looking at my client base as an advisor, which clients this could be suitable for who I might want to bring it up with?   

Ian Filderman [00:14:46] Yeah, I think you hit on probably the two biggest, if you'll excuse the phrase, possibly use cases. Certainly, there are others and, you know, far be it from me to to say to an advisor, Hey, this is specifically when you should be thinking about Solution A for any client. But I think in general, those two buckets capture pretty well. It is those people who are approaching or in retirement who need to manage sequencing risk, who need to manage downside volatility in trying to draw an income. That's certainly one where it may or may not make sense, but that, you know, that's certainly a situation where it could. And another one is exactly what you were talking about as well, where you've got somebody who's particularly risk averse and they need to capture some of the growth potential in the markets over time. But in order to be able to do that, they need to have some of the comfort and assurance that goes with a strategy that is designed or attempts to reduce that downside volatility and allow them to be invested for a longer period of time.   

James Rockwood [00:15:55] Perfect. That makes a lot of sense, and I think as far as we're talking a bit about that and we're talking about some of the how of the portfolios. What are some of the strategies or some of the benefits of releasing full portfolios and using sort of managed portfolios as opposed to individual mutual funds that aren't this sort of more balanced or mixed asset class?   

Ian Filderman [00:16:19] In part, I think that comes down to preferences and to the amount of time that advisors and investors want to dedicate to managing all of the different moving parts of a portfolio. Certainly, it's possible for advisors or investors to put together a portfolio that you know, might have characteristics along these lines, certainly to put together a portfolio of multiple assets and investment strategies. Many, you know, very good advisors do that every day and do it successfully. Same thing with certainly some, some investors as well. The beauty of a solution like this, though, is it really takes some of that burden off and allows an advisor or investors to, in effect, hire a professional portfolio management team. In our case, it's Irish Life Investment Managers and certainly in in other cases, it would be other asset managers that would be doing that work, who bring a daily focus on managing towards the objectives and in this case, the outcomes that we’re trying to design toward. So both approaches certainly can work and can make sense, I guess, from an advisor's perspective. There's, you know, two real benefits to incorporating a solution like this. One of them would be to take advantage of the capabilities that an institutional manager like in Irish Life Investment Managers would have. And the second is really a time benefit, not having to focus as much on the movements of each individual piece of a portfolio and rebalancing and making sure everything is where it needs to be, and instead focusing on some of the other elements of, you know, financial planning, goal setting and all of the different areas of value that advisors add to their clients. Any approach can work, but certainly we think this can create some leverage for advisors and investors from a couple of different perspectives.   

James Rockwood [00:18:12] On that note, how can advisors use RMP portfolios to manage their practice?   

Ian Filderman [00:18:20] You know, I think these can be probably multiple ways, and I'm sure some ways that that some advisors will think of that perhaps we haven't, but some of the more common ways would be as kind of a core component of a portfolio certainly can make sense for that for the right client. And you know, around which perhaps other investments may sit could also be a complement to an otherwise existing, well-rounded portfolio. Again, because of the way these are designed and the outcomes that they're trying to achieve could be a really good potential volatility mitigator alongside other components of a portfolio. I think it all comes down to the advisor, the investor that they're working with and really trying to figure out what the best solution is for them. But I think there's a range of options that that could make sense.   

James Rockwood [00:19:13] And then how will RMP help navigate uncertainty in the market in the longer term?   

Ian Filderman [00:19:19] You know, start with the fact that these are actively managed. So it's not just a model that's set with fixed allocations and it's forever going to stay there. I think that's really an important point here. You know, these are, you know, somewhat unique in that they go beyond traditional diversification, as we've been talking about. So yes, they, you know, have exposure to equities, many of them lower volatility, style strategies, dividend paying equities, low volatility strategies, multisector bond exposures around the world. It's got an allocation directly to alternatives, so into liquid alternative strategies. A multi manager approach, so it's not just investing with a single investment manager or single investment strategy. And finally, combines actively managed funds and passive ETFs. And all of those combinations and components can be changed, can be adapted over time by the portfolio management team that is looking at this. So as market conditions change, if we move from, you know, a lower rate environment to a higher rate environment, heightened volatility to perhaps slightly lower volatility, increased returns of equities versus bonds or vice versa, foreign versus domestic, all of those different components can come into play. And I think that's ultimately where, you know, a strategy like this can be successful. It is living, breathing. It's not just a static set of allocations. It really is a strategy that's designed to work and adapt over time as market conditions change.   

James Rockwood [00:21:03] Well, and I think these products make a lot of sense. I think you can really see why you're trying to target them, why you've released them recently, you know, the upcoming issues we talked about with sequencing risk with downside protection with the market volatility right now. You know, it's clear that there's a hole in the market that these are going to be able to help fill in any use that advisors can leverage both to potentially manage the practice to help as their own client base starts to enter that decumulation phase. And I think that these are really interesting products. So thank you so much for taking the time to speak with us about them today. I think this is a really exciting and innovative new solution and something that's targeting a problem and a situation or scenario is going to come up more and more with many Canadians as they're entering retirement age.   

Ian Filderman [00:21:52] Thank you very much.   

James Rockwood [00:21:57] At the top of this episode, I mentioned that market volatility is normal. Whether it's a meme stock or an economic meltdown, it's vital to help clients navigate the insecurity that comes from volatility. Providing well-timed reassurance to clients is a fundamental role for advisors. Being in tune with your client's holistic wealth plan, their risk tolerance, anticipating their feelings and reaching out when markets move are all part of providing this critical reassurance. So have a conversation with your client about how they feel about volatility. Talking about fluctuations in the markets and strategies to cope with them early on is a critical relationship builder. Your clients will thank you. It also lets you show them that you care and want to know when to reach out to provide that reassurance. Once again, I'd like to thank Ian for taking the time to join us today. I'd also like to thank you for continuing to tune in to the show. We'll be back with a new episode and a new fund to explore in two weeks. If you're enjoying the show or learned something new, head over to Apple Podcasts and drop us a five star rating and review. If you haven't yet subscribed. We'd love to have you join us. We'll see you next time on the frontier.