There is no doubt that we are in the midst of a financial planning revolution - particularly around retirement. Clients have more freedom and choice than ever before as to how they use their pensions savings and accumulated wealth, while their advice needs are much more complex. And at the coalface of this transformation are advisers.
But with great change comes opportunity, so how can advisers take advantage of this unparalleled period of business potential?
In the current market environment, advisers may feel under siege. Their client base is rapidly changing, both in terms of numbers and the types of people that are seeking advice. The baby boomers are at or approaching retirement and they bring more than £700 billion of funds to the market - that's a huge opportunity to service their needs. They are, however, demanding more from their advisers than ever before.
On a par with the Retail Distribution Review, the Pensions Freedoms introduced last year have also dramatically altered the retirement terrain. Gone are the days when the only option available to most clients at retirement was an annuity, effectively ending the ongoing relationship with a client. Now clients need advice for the long term: how best to use the Freedoms; how, when and how much income to take; how to sustain that income for the rest of their lives; and what's the most tax-efficient way to leave a legacy? Then there is the pension transfer debate to deal with - DB or not DB? It is indeed a very important question. Depending on their circumstances and goals, the answer will be different for every single client and involves on-going investment risk.
Better out(sourced) than in?
This backdrop creates immense operational challenges. Advisers often feel they have to do everything themselves - to be in control at all times. But of course, that becomes increasingly difficult in the face of more clients, additional admin and increasingly complex investment challenges that the pension reforms have created.
In light of this, many advisers are using a centralised retirement proposition and outsourcing their clients' investment management responsibilities to a discretionary fund manager (DFM). Taking this approach can save costs, free up valuable man hours and help mitigate additional investment risk to their business.
Improving outcomes through powerful partnerships
Outsourcing investment management can also help provide better outcomes for clients - advisers and DFMs working closely together, each focusing on their area of expertise, but with the client at the centre of that arrangement.
Most advisers will likely oversee their clients' holistic financial planning and tax arrangements, as well as their risk profiling, and will select the investment strategies. The DFM, meanwhile, can expertly manage the portfolios in line with their clients' financial objectives and risk tolerance, selecting the investments and rebalancing as appropriate to avoid portfolio drift.
With this clear delineation, the adviser has fewer distractions taking them away from their clients, who in turn can rest assured that their investments are being expertly managed. They also retain control of the relationship and can decide the level of contact, if any, between the client and DFM.
Find a practised hand...
With more clients expected to opt for some kind of flexible income drawdown in retirement, what specific capabilities should an adviser look for in a DFM in the new retirement landscape?
There are three main considerations.
- Do they have experience in investing in decumulation?
- How do they deal with the additional risk of investing in retirement?
- Can they offer a range of investment solutions to meet the more varied retirement goals of clients?
... for the new investment challenges
At Aberdeen Standard Capital, we have conducted a good deal of research into the at-retirement market and the accompanying investment challenges of investing in decumulation.
Sequencing risk, for example, caused by volatile or inconsistent investment returns, can be devastating, especially during the make-or-break early years of withdrawing an income from a pension fund. This is when pound cost ravaging (the reverse of pound cost averaging) comes into play. In this instance, unlike during accumulation, the investment return is no longer the sole objective. Rather, it is how that return is achieved that is just as, if not more, important.
Equally, a client in retirement has multiple and uncertain investment time horizons (no one knows exactly how long they will live). Again, it comes back to sustaining what wealth a client has for as long as possible. An adviser needs to ensure that the DFM they select is alert to these very real and important issues.
A strategy for decumulation
For a decumulation strategy to be most effective, the portfolio should display low volatility and aim to avoid any unexpected falls in value. This requires a different investment mindset. The investment manager should not be trying to beat the market, nor should they necessarily be trying to maximise returns. Instead, their aim should be to try to sustain what a client has while delivering the income they need. A DFM that can achieve this balance can help provide a smoother retirement journey for clients.
At Aberdeen Standard Capital, we have a breadth of investment expertise that sets us apart from many of our peers. We offer two distinct but complementary approaches, conventional return and target return, allowing us to meet the majority of client needs.
Our target return portfolios are a compelling solution for the investment challenges of decumulation. We believe that for portfolios to deliver income and sustainability over the long term, they need to display low volatility, avoid significant short-term losses but also deliver sufficient returns. This is exactly what our target return portfolios are designed to do and they have an excellent track record of doing just that, including during the global financial crisis.
As part of our investment process for target return portfolios, we consider the investment strategies that will work in different market scenarios going forward, not just those that have worked historically. Our portfolios are not overly reliant on any one asset class (equities, for example) and are designed to work in a variety of market conditions.
With the industry going through so much change, we believe our range of dynamic and flexible investment solutions can help advisers have a greater chance of meeting their clients' more varied and complex retirement goals.
The value of an investment is not guaranteed and can go down as well as up. It may be worth less than the client invested. Past performance is not a guide to the future.
To find out more about our discretionary service, email us at firstname.lastname@example.org