Heartwood Investment Management, the UK asset management arm of Sweden’s Handelsbanken, surveyed 64 financial advisers and found 61% believe there has been insufficient focus on decumulation solutions.
The overwhelming majority (86%) expect large growth in the number of clients requiring advice on this area over the next five years.
Matt Hollier, head of product at Heartwood, said: “Decumulation has traditionally played second fiddle to wealth accumulation in the financial services industry but this must surely change.
“Our study details the impact that tough headwinds can have on the growing number of clients entering retirement with less robust strategies in place.”
According to the study, advisers see the three biggest challenges to decumulation as managing market volatility (67%); calculating a sustainable income (63%); and longer life spans (55%).
Some 85% said clients entering decumulation were concerned about the impact of a disorderly Brexit on their retirement portfolios.
The majority (60%) believe their clients tend to overestimate how much income they can safely withdraw from their investment portfolios, compared to just 16% who said clients estimate approximately the right amount.
Sequence of risk
The research also highlights the role of managing sequence-of-returns risk.
If handled incorrectly, it can have a “catastrophic effect” on the beginning of the decumulation phase, where market lows combined with regular withdrawals can have a disproportionate effect on future income flow.
Around 97% of advisers said sequence-of-returns risk has a material impact on choosing an appropriate decumulation strategy.
Hollier added: “Sequence-of-returns risk – the risk of getting poor investment returns in the early years of retirement – can be critical for clients taking an income from their portfolio.
“Simply put, if markets lose money in the early years, and clients are withdrawing an income, then they have a smaller portfolio to benefit from when the good years come along.
“Conversely, if the early years are strong, clients have a larger portfolio so when the bad years come later, the poor returns have less of an impact. Advisers need to address this risk within their dedicated decumulation solutions.”
This is not the first survey to find that decumulation is going to take up a lot of advisers’ time.
In February 2019, International Adviser published research by The Lang Cat, which revealed direct-to-consumer (D2C) platforms are failing to offer a wide range of decumulation functions.
It found there was a great focus on building funds for retirement but a lack of tools allowing investors to manage those funds once they start to draw their pension.
But some companies have seen the gap in the market.
Financial services firm Brooks Macdonald launched its decumulation service to clients, while criticising the “superficial” coverage of pension decumulation.
In February 2018, Seven Investment Management also rolled out a decumulation planning service to help advisers in the UK look after clients at, and nearing, retirement.
A year earlier, Copia Capital Management, the discretionary fund management division of Novia Financial, unveiled a range of managed portfolios purpose-built for decumulation.