What is a realistic long-term rate-of-return assumption to use in planning for your clients? Whatever the answer, this is not a decision that should be put on auto-pilot. Each year, advisors should review with each client a portfolio return assumption that seems realistic and attainable, given current conditions and the client's asset allocation.

Large U.S. pension funds are in a quandary because they have chosen overly-optimistic return assumptions, averaging about 8%, and funding pressures are making it difficult to reduce the rate to more reasonable levels. The largest U.S. pension fund, the $300 billion California Public Employees' Retirement System, is deep into a review process that ultimately may reduce its assumption from 7.5% to 7.25%.

CALPERS argues that 7.5% is not unrealistic because it has achieved a 7.6% average annual portfolio return over the past 20 years.