Thesis Asset Management’s Lawrence Cook says advisers have been the innovators when it comes to decumulation but there is now a need for real solutions
It has been just over three years since the pensions freedoms were introduced.
The shockwaves it sent through the industry have been well-documented and obviously now mean consumers have more of a choice when it comes to deciding what they do with their retirement savings.
With such sweeping changes to the retirement landscape you would have thought investment managers would have been chomping at the bit to bring about new, exciting and innovative products to help guide consumers through the pitfalls of decumulation.
However, it has primarily been left to the adviser to innovate and bring about new services that genuinely improve upon the customer journey through retirement.
While annuities remain and have a place in the retirement offering, to many these products have essentially become defunct.
Meanwhile, fund providers thought they could spot a gap in the market and promote third-way products or clever funds, such as absolute return or dynamic multi-asset strategies. Such products have hardly covered themselves in glory and even some advisers struggle to grasp their concept.
Now this is not to say that there are not any good fund managers out there. There are plenty who do add value and they largely do what they say on the tin. The difficulty is that a strategy in a fund is slow to change and, by its nature, is ‘one size fits all’, which means all investors, irrespective of their needs and time horizon, get the same journey.
A given fund can deal with perhaps a limited number of the risks associated with decumulation but cannot hope to deal with them all, there are just too many dimensions. A fund can dampen down volatility but that comes at a price, often in fund charges and sacrificing long term growth.
Advisers are faced with a dilemma then:
- Delivering consistent client outcomes
- Ensuring recommendations to each client are personal and suitable now and ongoing
We can see that using a set range of funds for clients by itself is not enough without a further layer of service to make them work for each client.
As a result, there is a growing trend is for advisers to take on more of the work themselves and manage investments in retirement in separate pots.
Simplistically, this is a long-term pot that has a high level of risky assets to deliver growth and a shorter term pot that can be relied upon to deliver the cash to meet regular withdrawals. Some advisers have more pots than others but the principle is the same.
Given many advisers are doing this off their own back, this approach has not always been applied with sufficient science but rather using the long experience of working with clients on a daily basis.
This experiential or intuitive approach to investment strategies for decumulation has spawned quite an interesting range of different approaches.
What we have noticed is that clients are happy with this approach too. According to the Cicero Research report, ‘Retirement Income: The Price of Freedom’, clients are attracted to multiple pots with 79 per cent happy to see their retirement strategy in multiple pots.
If risky assets go up then such a solution will underperform a portfolio invested entirely in risky assets but this is effectively like an insurance premium. Most people buy fire insurance despite the fact they hope their house will not burn down and the probability of a fire is low, but it is an acceptable price to pay to guard against a risk that could have a significant impact on their lifestyle.
The pots approach is in effect a method of providing some fire insurance in case the worst happens in the short term and leaving enough in riskier assets to ensure clients do not outlive their wealth.
The challenge then is to mechanise the delivery of a service so that advisers can service more clients and clients can gain greater comfort that their wealth in retirement will last. Advisers have introduced the innovation, the industry now needs to carry the baton and come up with some real solutions.
Lawrence Cook is director of marketing and business development at Thesis Asset Management