Using a behavioral finance approach to turn spenders into savers

BlackRock's Chip Castille discusses the behavioral side of getting clients on a successful path to retirement

May 11, 2014 @ 12:01 am

By Richard F. Stolz

BlackRock Inc.'s managing director Chip Castille, who took charge of the giant asset manager's U.S. retirement group in January, has been grappling with asset allocation and retirement investing strategies for nearly a quarter century. Back in 1993, he was on the team that developed Barclays Global Investors' LifePath Portfolios, the country's first target date fund. Four years later, he developed Barclays' Portfolio Works, a tool that helps clients optimize asset manager structures.

In his current role, Mr. Castille, 49, oversees the development, project management and distribution of BlackRock's U.S. retirement strategies. He's got a lot to say about the work of advisers in helping their clients navigate a successful path to retirement.

InvestmentNews: What is the strategic perspective that advisers should bring to helping clients with retirement saving and investing?

Mr. Castille: It's important to help the client think about what goes into making a successful retirement outcome, and their responsibility at each phase of life. For young workers, it's all about beginning with the appropriate asset allocation. Pre-retirement, it's about helping individuals understand where they are [in terms of retirement capital], and giving them the opportunities to close any gaps. In early retirement, it's about how much they can spend and still maintain long-term security. And then late retirement, it's about the asset allocations, and helping them assess whether — and how much of — their income should be annuitized.

InvestmentNews: What approach to leading clients to the necessary savings commitment works best?

Mr. Castille: When clients meet with advisers, they are in investing mode. But they're still approaching retirement savings as, "Every dollar that I save means something that I can't spend today." This is where insights from behavioral finance come in. It helps to communicate that the client already owes himself the money for the future, and that it's actually quite a lot. By saving a little bit more today, he's actually lowering — dramatically — the amount he owes himself for the future.

They may see saving, for example, 12%, as a Herculean sacrifice. It's not. Because if you expect to live almost as long in retirement as you did working, what that means is you're spreading your "paycheck" over those 70 years, as opposed to just those 40 working years, by only giving up 12% to 13% now. It's the bargain of the century.

InvestmentNews: BlackRock's CoRI modeling system and its corresponding mutual funds operate along these lines, right? The model projects, based on your age and retirement income goal, what your current savings will buy you in future retirement dollars?

Mr. Castille: Yes, and with CoRI, we're also giving clients the information on how they can close the gap going forward, if there is a gap, based on how conservatively they want to invest.

InvestmentNews: So you don't embrace the idea of forecasting a "retirement number" — a required capital accumulation at retirement to meet one's retirement income needs — as some other financial companies do?

Mr. Castille: Not particularly. Our model is dynamic. It's tracking how your portfolio is going to perform, as well as the current cost of future retirement income. Both of those have their own evolution, and we're tracking how likely they are to evolve together. So, it puts the individual on the footing that they like to be on, focusing on income and savings rather than an accumulation of wealth. Wealth is just a means of getting to income.

InvestmentNews: Currently the model is designed only for people in the 55-65 age bracket. Why?

Mr. Castille: We plan to expand it first to the 65- to 75-year-olds, because we think there's more interest there. Longer term, we might be able to go to people younger than 55. The main message for the younger group is, pre-55, save 12% to 14%. At 55, get your bearings, course correct and close the gap, if there is one.

InvestmentNews: Since the modeling tool is basically oriented toward individual investors, where does the adviser fit in?

Mr. Castille: The idea is for individuals to use the website as a way of thinking about the problem, then talk to their adviser. The adviser can take that and very quickly and easily give clients a much more sophisticated and refined solution. It's customized, and can include the preferred active strategies of the adviser.

InvestmentNews: The model currently assumes future returns on the Russell 1000 and 2000 indexes in the 7% to 8% range. What's the basis for that expectation?

Mr. Castille: Our assumptions are built on bond yields, and we forecast the equity returns using BlackRock forecasting technologies. We ask, given the way that capital is allocated in the world, what would we have to believe about the markets for this capital to be allocated efficiently? So, what returns would people have to expect for them to want to hold this market portfolio? We call that reverse optimization.

InvestmentNews: Target date funds have proven popular with investors. But shouldn't advisers worry about losing their purpose, since target date funds handle both asset management and asset allocation decisions as clients age?

Mr. Castille: Many worried about that when target date funds first become popular. It was similar to the reaction to mutual funds — why would I as an adviser use a mutual fund when I can pick the securities myself?

But the reality is with a well-designed target date fund, it's not just about the investment capabilities. It's about the fact that it's wrapped in a package that's easy to understand, and provides scale and efficiency. Advisers still do the due diligence, and recommend funds that meet their clients' needs.

InvestmentNews: The traditional expectation of retirement at age 65 or younger won't work out for many people. What are the implications for lifestyles and investing?

Mr. Castille: We're going to get much more flexible about retirement. Boomers will transform the way we think about retirement. Some will work longer, others may taper off gradually. They're entering that phase of life with more human capital than other generations, and they're going to use it. We'll see more creativity in asset management services around flexible spending and retirement, and a focus on the difference between essential and discretionary spending. It will be a little bumpy at times, but I think we'll get to a good place eventually.

Richard F. Stolz is a freelance financial writer in Rockville, Md.

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