Taking stoch of retirement

1 February 2010 8:00 am

The older I get, the less I trust forecasts. The trouble is that so much of our business depends on making a judgement on what might take place in the future.

Worse, being seen to have undertaken due diligence before making an invest- ment decision, which will involve properly assessing what the likely outcomes may be, is now more important than getting that decision right.

Demonstrating that a proper process has been followed will protect an adviser from action, even if the outcome is poor for the end client. This came across strongly at a round table session, organised by Cofunds, which I chaired last week. I have now carried out the chairman’s role on a number of occasions but this was the liveliest yet. The title for the discussion - Is Retirement Dead? - did not lead me to believe that a contentious debate would develop but develop it did.

At the core was the usefulness (or otherwise) of stochastic modelling. I took the trouble to look up the definition on the worldwide web.

According to Wikipedia, a stochastic model is a tool for estimating probability distributions of potential outcomes by allowing for random variation in one or more inputs over time. I hope you are now all a lot wiser.

It was Suffolk Life’s John Moret who brought this way of assessing what might happen into the argument and Chris Woodhams of IFA Prescient who took some delight in rubbishing the concept. I hadn’t laughed so much at one of these round tables before.

They both had a point. At least these models provided a basis on which to make a judgement. Whether that call would work out for the client was another matter entirely.

A stochastic model is a tool for estimating probability distributions of potential outcomes by allowing for random variation in one or more inputs over time. I hope you are now all a lot wiser

In the end, the discussion centred not so much on whether full retirement was an outdated concept but on how best to construct investment portfolios, given the capricious nature of returns.

Cofunds’ Alastair Conway, himself once an adviser, pointed to the massive opportunity dropped into the laps of the IFA community by the increasing variety of investment products.

He worried, though, whether pressures would create a two-tier advice scenario, with IFAs serv- icing the rich and Mr & Mrs Average denied independent advice. As Joseph Clark of No Monkey Business (what a great name for an advisory firm) opined, IFAs are good at listening, so the whole holistic financial planning idea belonged to them. Not that they were necessarily sufficiently well trained in this field, according to Technical Connection’s Tony Wickenden. But with investment confidence undermined by the events of the past couple of years, who else could realistically hold the hands of those seeking advice and reassurance?

It was, though, Chris Woodhams, who made the closing comment, with whom I most related. He expressed anger at the way in which his clients, as well as having to fend for themselves in preparing for retirement, with all the risk that entailed, were also carrying the risk attached to funding civil service pensions through their role as taxpayers. A two-tiered society had developed - one that the politicians had no stomach to correct.

This is a topic I have covered before. With the Government strapped for cash, it is hard to see what they might be able to do but it is a problem that will need addressing.

In the meantime, the lively and stimulating conversation around the Cofunds’ table allowed me to forget that China, probably now the world’s second-biggest economy, was reining in bank lending because of fears of overheating. The market may be up but we are far from being out of the woods.

Brian Tora (brian.tora@ centaur.co.uk) is principal of the Tora Partnership

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