Evan Riddell still uses ETFs for his retired clients, but largely avoids purpose-built yield ETFs marketed as retirement decumulation tools
Each month at WP, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're focusing on ETFs.
ETFs have been a game changer for wealth accumulation. Evan Riddell, Wealth Advisor, Investment Advisor, Associate Portfolio Manager and founder of Riddell Wealth Management of Richardson Wealth, says that the advantages of low-cost broadly diversified ETFs have been hugely significant for advisors and their clients. They’ve brought down costs, offered more targeted and sophisticated exposures, and allowed advisors to focus on the planning services that increasingly drive competitive advantage. In decumulation, however, those same advantages may not be as pronounced.
Riddell, who specializes in serving retired clients, explained how he approaches the thorny challenge of decumulation. He notes how ETFs fit into his formula for clients and explains how they can still offer certain advantages. He notes that many of the new ETFs offering high yields and aimed at income-seeking client cohorts like retirees tend not to fit into his approach. He argues that when it comes to retirement and decumulation, discipline, process, and client relationships should trump product.
“A lot of these products are designed specifically to generate income and they can have a legitimate role. But for our clients, generally, we haven't found the additional complexity or cost or possible risks associated with those outweigh the benefits that are there. We don't really see them as a necessary tool to have in there. For us, a distribution is not the same thing as a retirement income strategy,” Riddell says.
How Evan Riddell approaches decumulation
Decumulation planning in Riddell’s practice begins with a full understanding of the client, their needs, and their goals. Through that process he determines what the client needs on a daily, weekly, monthly, and yearly basis. The portfolio, then, is broken down into three categories. He keeps 12 to 18 months of secure liquid assets in place to cover upcoming needs. He allocates several years of fixed income runway to help the client ride out any storms in the equity market and makes significant equity allocations to provide an ongoing long-term growth engine that clients need for a multi-decade retirement.
Riddell regularly revisits clients’ needs, goals, and shifting realities once that plan has been established. He talks them through what can happen during drawdowns or periods of market volatility and does “lifeboat drills” with clients, discussing what will happen when markets fall.
While the allocations Riddell makes for his retired clients come with natural distributions and some yield, he says that his team doesn’t work to maximize yield just because someone has entered retirement. He argues that the old standbys of total return, diversification, cost, risk, and tax efficiency should outweigh any particular income yield. Portfolio rebalancing allows Riddell to replenish his clients’ ‘cash’ sleeve on a regular basis without the need for higher yielding products.
What ETFs can, and can’t, do for Riddell’s retirees
Riddell says he will still use ETFs in many of his retired clients’ equity and fixed income allocations. Typically, an ETF will be a lower cost and more tax efficient option than a mutual fund with the same strategy. However, he notes that sometimes a mutual fund will be more advantageous.
“I'd rather own a well-priced properly-managed mutual fund built around an investment philosophy that I can get behind than a poorly constructed ETF that simply gets to trade on the exchange,” he says.
Beyond the ease with which an ETF can deliver diversification efficiently, Riddell says that there are also advantages around cost transparency and reporting. He believes the ETF industry has allowed advisors to create increasingly sophisticated portfolios while ensuring clients fully grasp what they’re getting for their money. He says he wants the ETF industry to focus more on driving costs down than creating new products ostensibly aimed at retirees.
ETFs have also empowered a huge cohort of DIY investors to accumulate wealth on their own. Riddell accepts that successful DIY accumulation is easier than ever, but that accumulation does not mean they’re set up to decumulate successfully. Coordinating when and what is drawn down without taking on additional tax bills or incurring sequence of returns risk. The sort of high-yield ETFs that Riddell avoids may be attractive to that audience, but he argues that they can come with trade-offs that some investors may not fully understand.
For advisors looking at decumulation tools for their retired clients, Riddell says that while advisors can use ETFs to great advantage, the formula should focus less on the type of fund being used.
“Investment products have been increasingly more efficient and accessible, which is great. Our responsibility as portfolio managers is really to build the correct portfolio on the onset, keeping costs reasonable, using an evidence-based approach or approach that works with the client's philosophy,” Riddell says. “We should focus our energies on the things that have the greatest impact. Once the portfolio is in place, those things are helping clients with behaviour, taxes, financial planning, spending decisions, discipline implementation. Those are really the critical pieces. You know, a great ETF portfolio without a great retirement plan is still just a portfolio.”
