Richard D’Ambola • Succasunna, NJ
Richard D’Ambola & Associates, LLC • cfd Investments, Inc.

For many investors, planning for retirement can feel like a swing and a miss. Rich D’Ambola approaches four challenges to retirement planning—helping his clients hit home runs.

Proactive Advisor Magazine: Rich, what concerns are you seeing from clients and prospects?

While there is a lot of hype, marketing, and seminars by our industry regarding the retirement crisis, unfortunately, a lot of it is very real.

Our practice tends to center around pre-retirees or those already in retirement, and there is a terrific need for client education on several issues. There are four core areas people may not really understand that we talk about: longevity, taxes, health care, and inflation.

In terms of longevity, it is a matter of those in retirement not outliving their assets and other related income streams. Medical technology is amazing, and it is estimated that well over 50% of the population will outlive government-estimated life expectancies. Watch Willard Scott in the morning and you will be amazed by the number of people celebrating their 100th birthday. A good financial plan has to take longevity into account for both husband and wife.

Taxes are a big unknown and also require contingency planning. We are at one of the lowest points in history in terms of tax brackets. Is that going to continue? How might increases affect retirees? And related to that is all of the uncertainty hovering around Social Security funding for the long term—will that in some way impact people retiring over the next 10-20 years?

Health-care costs are also a matter of great concern for retirees. There are all of the changes moving through the system, and each individual’s health is so unpredictable.

Adding to all of these matters is the outlook for inflation. What will the interest rate and inflation environment over the next 20 years be like? Simple mean reversion says both have to go up.

So, yes, there are plenty of anxieties out there, and they are very real.

What types of solutions do you provide?

We strive to bring real value into people’s lives as far as developing financial plans and investment strategies that can make a difference. We want to take a macro view of their needs and find solutions to grow their assets and income in retirement. This includes, for many people, introducing them to risk-management principles and active investment management, which they likely have not been exposed to before.

How do you introduce the topic of risk management?

We have come to the belief that sequential return risk has to be a top priority for anyone planning for retirement. It is the hard trade-off between needing asset growth over time to fund your retirement and the unwillingness to expose portfolios to the large risks that can decimate a portfolio.

We have seen with new clients that come through the door how bad an impact the credit crisis had on their retirement portfolios. They are facing difficulties in even getting back to where they were. Sure, the markets may have recovered, but that does not help someone who may have had to draw down their already underwater assets during the past five years. So that is what we mean by sequential return risk—it can all be in the timing of how markets are performing at any particular point in time relative to your personal situation.

How do you overcome that?

First, we explain to clients about market cycles. Most everyone is aware of market crashes and the big bull market periods, but few really understand market cycles. Sixty percent of the time markets are heading higher, 20% of the time they are in bear markets, and 20% of the time they are going sideways.

So if you really look at that, history tells us that 40% of the time markets are in unfavorable conditions. How are you going to manage that? Does it make sense to take a passive approach? We think not.

That is why we employ third-party active managers who have sophisticated models and methods of portfolio allocation. They are not bound to sit idly by and watch a severe market downturn.

I tell clients it is like having a highly advanced Doppler radar early-warning system. These managers have the technology to know a Category 5 hurricane might be coming. And just like with a hurricane forecast, they may not always be right in predicting the actual occurrence or the severity of it if it does hit. But their systems have been designed to make the fundamentally correct call on the markets. Wouldn’t you rather have that knowledge working on your side and have the chance to make preparations for a storm?

Do clients understand active management?

A very helpful piece in explaining the active management story is showing them the math on market losses. Few people realize that if they take a 40% loss in their portfolio, it takes far more than a 40% gain to make it back.

There is another aspect that is terribly important to clients: After the dot-com bust and 2008, many are fearful of the stock market. By explaining the risk-management and asset-protection elements of active management, we can help many of those people be more comfortable with using equity investing. That’s where history can work in our favor, as compounding market returns over time is critical to building wealth.

Is this the case only for equity investments?

No, that is another benefit of using our third-party active managers. It is not plain vanilla equity or bond mutual fund portfolio construction. Active management can be used with both types of investments. And these managers are able to incorporate alternative investments to build in more portfolio diversification, taking advantage of less-correlated asset classes. This is all part of the risk-management element of what they do, and there is a role for every tool that they use at one time or another.

One of the active strategies we like in particular has the ability to incorporate leverage during strong bull markets and to short the market during downtrends. Going back to my weather analogy, it is akin to changing your clothes to fit the season, whether that is employing short-term tactical tools or placing greater or lesser emphasis on a particular asset class or strategy as conditions dictate. Doesn’t that make pretty good common sense?

Great explanation, Rich.

I am there to serve clients with what we think are the very best fiscal solutions. My job is to look at things at all levels and uncover, identify, and solve problems. Risk management is a big piece of my job description—as is making sure clients have an understanding of the importance of its role within their investment portfolios.