I am hugely impressed with the sophistication of retirement planning processes and the tools and technology employed by advisers to create the optimum portfolio. And I remain convinced that, for the foreseeable future, the experienced, insightful advisers who have genuine empathy with clients will become significantly more important and valuable.
But, of course, plans are only plans. As Mike Tyson once said: “Everyone has a plan. Until they get punched in the mouth.” Things happen. I was reminded of this when I read Ben Carlson’s recent Wealth of Common Sense blog, The Many Uncertainties Involved in Retirement Planning.
Carlson reminds us market returns will not align with the plan, nor will future interest rates, the severity and timing of bear markets, the magnitude and timing of bull markets and the actual sequence of the returns. I guess all this goes with the territory.
Now, consider the other variables: personal spending needs, financial desires, how much longer the client is willing and able to work, changes in long-term goals, life expectancy, capacity and willingness to take risk and, indeed, perception of risk.
We also need to consider positive life events, such as an unexpected inheritance, and challenging events, such as the need to help with parents’ long-term care.
And there is more. Tax rates can and will change, as will benefits. More or less people may be dependent on the client financially. Divorces can occur, new relationships can emerge and new children can arrive (just look at Mick Jagger becoming a parent again aged 73). Serious illness can demand private healthcare. Finally, clients are not always rational and may choose to forget the plan in favour of purchasing a Porsche or an around- the-world trip at the age of 80.
So the only certainty is that the chances of the analysis and carefully crafted plans actually working as designed are, in fact, zero. But does this makes planning any less valuable?
Preparing for battle
Ex-US president Dwight D. Eisen-hower’s opinion on plans was a little more elegant than that of Mike Tyson when he said: “In preparing for battle, I have always found that plans are useless but planning is indispensable.” I think that goes to the nub of it.
I have some (retired) friends who have been sailing the world for the past 10 years. They fully understand how carefully you need to plan for crossing oceans in a small sailing boat. Irrespective of how well you check weather and so forth, anything can happen once you have set off. Winds do not always blow in the direction forecast; they can be frighteningly strong or frustratingly weak. Sometimes equipment breaks. But they always turn up at the destination within a few days of their planned arrival.
Their success is due to two factors: first, allowing for contingencies and, second, revising the plans when necessary. This is an exact parallel with retirement planning. Advisers must ensure there is contingent cash available to provide income so clients do not need to sell investments at a loss. Even more importantly, they must make sure the correct action is taken when things are not going to plan.
It is worth remembering the rest of the Mike Tyson quote: “Somewhere during the duration of the event you’re involved in, you’re going to get the wrath, the bad end of the stick. Let’s see how you deal with it. Normally people don’t deal with it that well.” And that is where the adviser steps into the ring and earns his fee.
There is a good deal of comment about fees in the long-term savings and investment market. My personal opinion is they are heading south across the value chain with one exception. Advice. It is the only place where demand looks likely to exceed supply for the foreseeable future. But it can be challenging putting a price on something that is not always tangible. How much is helping clients deal with the “bad end of the stick” worth?
Without wanting to stretch the boxing analogy too far (not least because I know nothing about the sport), the adviser’s role in the client’s retirement journey seems in some ways similar to that of the boxer’s second in a match.
On the one hand, quite technical in terms of understanding what tactics need to change, what injuries look dangerous and so forth. On the other, providing emotional support and encouragement. Of course, none of this may be needed until half way through the event and possibly not at all. But no boxer steps into the ring without a plan and without a second to help him adjust if it is not working.
What is the best way to pay for this vital service? I can see that basis points on the amount invested has many attractions for clients and advisers alike. But there is a suggestion it does not always really reflect the services being provided in a given year. As a “retired” individual, I have finally got my head around paying (reasonable) ad valorem fees on the assumption my adviser is ready to step into the ring when needed. I am sure many clients must feel the same.
Malcolm Kerr is senior adviser at EY