Matchmaking does not only fall in the orbit of dating websites and meddlesome friends. Some of the keenest minds in asset management are focused on a quiet, daunting task: squaring away the funds and debts of big pension plans.
“Liability management” is as close as it gets to a buzzword for institutional investors and their financial stewards. They use a host of complex formulas to pit today’s measly assets against tomorrow’s vast expanses of liabilities.
This matching fun should not just apply to the big boys, says Len Reinhart, a weathered US money management veteran. Average investors, too, should frame their futures against the sneaky backdrop of their own “trail of liabilities”.
Many investors still play a zero sum game against the markets, a tactic that flopped in 2008 when “beating the benchmark” meant losses of 30 per cent. Others now map their portfolios against “goals”, planning around pricey items such as weekend houses and retirement needs.
Neither approach is enough, Mr Reinhart says, because they overlook costs oozing from every asset and relationship in a financial life. These liabilities form the true bottom line investors always trip over.
Plotting against liabilities seems a simple idea, but few individuals – or their advisers – use it as an investing pillar. Mr Reinhart says he tried this tack during a career that included senior posts at E.F. Hutton, Smith Barney, and the Lockwood Advisors shop he founded and sold to BNY Mellon. He tried elaborate tools and quick forms, but never hit on the right recipe.
“People would say, ‘That’s nice’,” he recalls. “But when the markets took off, everybody was thinking about accumulation.”
Most advisers, he adds, still rely on investment plans that “ask clients how much risk they want to take, and then give them that amount of risk”. They pick “best of breed” asset managers for the job, and liabilities are a side matter.
It all hit home for Mr Reinhart during the market free fall of early 2009. He had picked a lousy moment to “terminate my wealth-accumulation phase”, having put in for retirement months earlier.
Watching his aggressive portfolio shrink by half, he sized up the cargo of people, properties, cars, pets, “toys” and other trappings he had amassed with his family – all no longer moored to a steady income. With each of these so-called assets, upkeep costs tagged along. Multiple “liability streams” flowed alongside future bills for retirement, healthcare, and such. The lone investing goal left was to cover outlays with available funds.
Suddenly, finding star money managers – his profession’s core talent – was beside the point. Mr Reinhart says he spent months hacking at expenses: a credit card funding his children’s iTunes tab was one easy target, and he quips about a “no-replacement policy” for pets.
The larger shift was treating everything he owned as a “retirement asset” and focusing on “absolute returns”. That meant picking investments and resetting holdings to curb all sorts of taxes, and slashing his money management fees by 75 per cent – no longer sending a good cut of gains to managers before seeing his take. He tries to pay 40 basis points at most.
Those chores saved him big dollars, and nursed his portfolio to health.
Minding liabilities and pruning costs may be the safest path for today’s retirees and the hordes behind them who are probably not saving enough to support long, healthy lives ahead. The problem is that such wisdom is hopelessly boring. Advisers can sell the next trend, but preaching frugality is deadly stuff.
Mr Reinhart says tools exist to help investors align taxes, fees, assets and liabilities, but trying to chart personal liabilities against portfolios remains lumpy. The key might not be fancy devices, but rather matching advisers to a new set of skills.
“There are lots of intelligent people who can tell you about the mathematics of financial products, but I’d want an adviser out of school to be a psychology major with a minor in business or finance,” he says. “What clients need is a coach to help them make the right decisions.”