Earlier this year we interviewed a number of financial advisers to contribute to a report looking at centralised retirement propositions, produced by CWC Research and The Lang Cat and sponsored by FE.
The report looks at suitability, decision making and market influences with some extremely interesting results. You can access more information about the full report here. Last week I caught up with Clive Waller to gain further insight into the key findings.
Clive identified three areas of significant interest:
» Challenges around decumulation
» Use of cash (or near cash) holdings
» Sequence risk
Challenges around decumulation
From longevity risk to sequence risk and legacy requirements, investing for clients in decumulation is a very different affair to building up a retirement pot in the first place. One might expect that to be reflected in advisers business practices. Remarkably, however, this is rarely the case. Just one in four firms we spoke to view decumulation as presenting a different advice challenge to accumulation.
A worrying number of firms are either complacent about specific retirement income risks such as sequence risk, or are entirely ignorant about them. A large number of respondents insisted that their clients are wealthy enough to not need to worry about market volatility or longevity risk, even though this isn’t necessarily borne out by the portfolio sizes reported to us.
Given the majority of adviser clients are either in or near retirement, this is a real cause for concern.
Use of cash (or near cash) holdings
While the value of the cash reserve – for example to avoid having to sell investments during a crash- is not in doubt, there seems to be very little consensus as to how much cash a client should hold. For what it’s worth, our view is that holding around two years of cash gives the adviser time and space and avoids sub-optimal forced sell-downs. Whatever your view, we found a striking lack of consistency among advisers on this point. Some feel there is no need for a cash reserve, while others believe that up to 10 years is necessary.
Too many advisers think they can address the issue when the client’s review comes around. Either they know when market crashes are due to arrive, or they are taking needless risks!
I mentioned sequence risk earlier and the inconsistency continued when we asked firms how they addressed this, which is possibly one of the biggest risks facing investors in drawdown. It may be that a long bull market has sowed complacency amongst advisers, or simply that memories are short.
At the heart of sequence risk is the ability to recover from early losses. If we take the example of the dotcom crash and the correction that followed the banking crisis (two big downturns within a decade) it’s easy to imagine the devastation that would be wreaked on a retirement portfolio that’s still invested as if for accumulation.
Almost one in four respondents said they rely on reviews to combat the threat of sequence risks, while nearly one in ten said they have no particular policy in place. Another 40% use cash, but remember there is little way of rule of thumb on this.
One respondent said
“We haven’t had any problems with this as yet”.
This neatly encapsulates our concerns. Almost every proposition has been formulated since the last serious correction.
It doesn’t feel as if reviews are a solution to sequence risk. Good planning and portfolio construction are the solution. Cashflow modelling and reviews may help an adviser understand the impact of a downturn on a client’s finances, but it won’t get their money back.
Some of the key points Clive highlights from the report were also discussed at our recent event. However, the report contains a wealth of valuable insight and is a robust, comprehensive and informed analysis of the outsourced Centralised Investment Proposition market.