Why fiduciaries may want to consider fixed income

Investment clarity can help further the advisor-investor conversation

Why fiduciaries may want to consider fixed income

Jack TierneyThe US Marine Corps motto is “Semper Fidelis” or “Semper Fi” for short, meaning “always faithful.” Another related Latin word, “fidere,” means “to trust.” From this root also comes the word “fiduciary,” which refers to acting in a capacity of trust or confidence. While “faith” and “trust” are staples of love songs and wedding vows, “fiduciary” clearly denotes a financial relationship — and this summer, many of you may be embarking on new fiduciary relationships.

What is the fiduciary standard?

As of June 9, the financial services industry began to comply with the Department of Labor’s (DOL) fiduciary rule, which revises the way in which financial advisors will make recommendations to retirement investors and provide advice concerning retirement investments. Advisors may tell their retirement clients that they will now be managing their IRAs from a fiduciary standard. Retirement investors may also receive a letter from their advisor’s firm informing them about the rule.

While these communications may create some initial confusion, they could also turn into great opportunities for productive, forward-looking conversations about financial goals and objectives, as well as to reinforce the financial plan that the investor has with the advisor. The DOL fiduciary rule seeks to establish a standard that places retirement clients’ best interests at the forefront of investment decisions. The rule itself is undergoing a review, and the DOL will be considering changes that the industry hopes will make the fiduciary standard easier to understand and implement. It is possible that the Securities and Exchange Commission will expand this concept to all advice and recommendations provided by investment advisors and broker-dealers. For now, the only certainty is that financial advisors must act in the best interests of their clients when advising them about retirement assets.

The clarity of fixed income

A famous former US secretary of defense once described what he called “known knowns, unknown knowns, and unknown unknowns.” Got that? It actually makes some sense when we think it through. There are things we know, things we know we don’t know, and things we don’t know we don’t know.

In investing, there are plenty of things we don’t know — like where the stock market will be a year from now, or whether geopolitical conflict will make oil prices skyrocket. That’s why we talk so much about diversification — to help your portfolio be ready for a variety of possibilities.

When it comes to the basic features of fixed income, however, this asset class might fall into the “known knowns” category, and that sort of clarity can really help a financial advisor explain a retirement plan to a client. Knowing what type of bonds are owned in the portfolio, what the amount and frequency of the income stream looks like, and how long those bonds will remain in the portfolio provides a lot of certainty. That certainty helps tremendously with planning, whether for monthly budgeting, reinvestment of interest, or maturity dates when principal is returned. That’s not to say that bonds don’t have risks, but again, those risks are known (as illustrated by the fine print below this blog).

Making good choices over the long run

Financial advisors have many fixed income investment choices to provide their retirement clients, and they’ll be evaluating those investments through the lens of the DOL fiduciary rule as implemented by their firms. Products that contain benefits like professional selection, defined portfolios, known holding periods, dependable income streams and reasonable fees can continue to serve a vital role in reaching client objectives.

Remember, investing is a long race with no finish line, whether for IRAs or other accounts. Stay ready for what you don’t know, and appreciate what you do.

Important information

Blog header image: 123dartist/Shutterstock.com

Diversification does not guarantee a profit or eliminate the risk of loss.

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates.

Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Jack Tierney

Head of UIT Investment Policy and Governance

Invesco Unit Trusts

Mr. Tierney joined Invesco in 2010. Prior to joining the firm, he was the head of product development, management and investment research for Van Kampen Unit Trusts since 2003. During his tenure with Van Kampen, he held positions within Van Kampen Consulting, business development, marketing services, mutual fund product management, and distribution, having started as a wholesaler with Van Kampen Merritt in 1984.

Prior to Van Kampen, Mr. Tierney spent four years with Merrill Lynch in Chicago as a financial advisor. He began his career as a high school business teacher and basketball coach in the Chicago suburbs. Mr. Tierney earned a Bachelor of Science degree in Marketing and a Master of Science degree in Business Education from Northern Illinois University.

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