Accumulating assets is the easy bit. Well, to put it more realistically, it is the easy bit compared to managing the decumulation phase. Like a lot of things in the investment management sector the comparison is relative, says David Ogden, head of compliance for Sparrows Capital.
It would be glib to contend that accumulating a pot of assets to see one through retirement is simple. There are all sorts of life events and market circumstances that can intervene. But the principles really are straightforward. Investments made consistently and sensibly over a working life give individuals the best chance possible of a solvent retirement and of meeting whatever issues later life may throw at them.
It could even be argued that periodic market crashes can benefit investors in the long run as they represent an opportunity to invest in long term growth assets at bargain prices. That is almost the precise opposite of the damaging effect that sequence risk can have once accumulation is no longer possible.
But relatively few individuals reach retirement with a large enough pot of assets that their main dilemma is whether to holiday in the Caribbean or the Far East.
Most retirees will face the rather more pragmatic decisions of how to balance their necessary and discretionary outgoings with their reduced income and diminishing assets, and how to avoid the ultimate nightmare of running out of funds altogether.
I don’t think many people will want to be in a position of throwing themselves on the mercy of the State when they are at their most vulnerable.
Potential solutions abound, including cash buckets, annuities, smoothed funds, guaranteed income products and risk assets as well as myriad combinations and variations thereof. The complexity of the retirement and pre-retirement decision process underlines the value that financial advisers can provide.
It is perhaps a truism, again, that individuals in the accumulation phase can be more easily grouped and provided with very similar investment solutions, which perhaps explains the growth of model portfolios, but that may not be the case with retirees.
Everyone faces their own very personal set of issues in retirement. Health and long-term care are particular concerns that can focus the mind on doing everything possible to ensure a comfortable future.
That explains why the regulator is taking such a keen interest in decumulation propositions. Getting things wrong at this stage in life and the potential for poor outcomes is frightening. The fact that the UK’s Financial Conduct Authority (FCA) has excluded decumulation from its proposals to simplify advice and redefine the guidance/advice boundary emphasises the complexities involved.
The subject has been on the FCA’s radar for some time now, although the intervention of Covid and ongoing issues around defined benefit pension transfers have delayed the process. It could be argued that the regulator’s focus should have been in this area before pension freedoms were introduced in 2015 but being in sync with politicians is always challenging.
So, following the adviser survey which the FCA undertook in 2023 and the Retirement Outcomes Review published last month, what’s next?
Well, the detail is interesting, but the basic principles could have been readily identified in advance, as they follow well established themes. Inevitably, the key to all of this is suitability with all its attendant complications. The regulator really began to focus on that topic around 15 years ago, although the rules are essentially unchanged since I was a regulator nearly 30 years earlier. The two main themes have been thoroughness and consistency.
Consistency is challenging, but it is safe to say that any advisory firm that cannot demonstrate a strong and well controlled process for determining what solution will suit each individual client will be lucky to escape regulatory scrutiny.
Most important is the conclusion that a process that worked perfectly well in the accumulation phase will not be adequate in decumulation. The variance in client circumstances and priorities is just too great.
While the concept of the Centralised Investment Proposition (CIPs) is well established, the Central Retirement Proposition (CRPs) is perhaps less widespread. But since the growth of CIPs post-Retail Distribution Review (RDR) and since the introduction of Consumer Duty last year, that trend has accelerated.
The reasons are not hard to define. It is rare that an adviser can add value through pure investment advice; they are far better positioned to provide value for money through the more complex and client-centric aspects of their service, including retirement planning.
If there is one thing that clients value at this crucial stage in life it must be confidence. Confidence that they can live out their days in reasonable comfort with no need to worry about coping with basic requirements.
That objective may be best met by the adoption of a clear, comprehensive CRP delivering a toolkit to cater for the needs of the target market. Flexibility is beneficial, but having the right building blocks in place is absolutely vital.
The advisers’ task then, before offering a service to their clients, is to be confident that the tools they have chosen are likely to deliver both good value and good outcomes.
By David Ogden, head of compliance for Sparrows Capital.
