Sequencing risk is not fully understood by financial planners, despite the “dire consequences” it can have for an SMSF portfolio, a finance academic told delegates to this week’s SMSF Professionals’ Association of Australia (SPAA) technical conferencee.
It is imperative that financial planners understand the “catastrophic” impact sequencing risk can have on an SMSF portfolio, said Griffith University professor and partner at Drew, Walk and Co Michael Drew, who defines sequencing risk as “the worst returns in their worst order”.
Consideration of sequencing risk is imperative during the accumulation phase, when the risk for clients is the ordering of returns as opposed to the average rate of return, said Mr Drew.
“[However], the gut reaction of many financial advisers it that the rate of return is more important,” he said.
“When you consider recent data suggesting that SMSFs can have around two-thirds growth assets and one third defensive assets... then there is a genuine risk of SMSF trustees falling foul of sequencing because of their asset allocation decisions,” he added.
Financial advisers should take an outcome-oriented approach to portfolio construction, according to Mr Drew, and review their clients’ investment strategy regularly.
He added advisers should be aware asset allocation in the accumulation phase may differ from that in pension phase due to cash flow requirements.
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