DFMs are not ready for the wall of cash that is going to hit them as a result of the pension freedoms, and few have suitable model portfolios for investors who shun an annuity and stay invested, says Graham Dow, head of wealth manager propositions at Standard Life.
Investors who chose to stay invested beyond retirement and take an income from that cash have different needs to those in the growth stage, and few DFMs have created model portfolio products to suit them, says Dow.
“In the growth stage volatility is your friend, when you are taking money out volatility is your enemy,” he says. Of the 41 DFMs Standard Life has on its platform, just two have suitable model portfolios, he says: Standard Life Wealth and Charles Stanley.
The big risk, says Dow, is that investors in the early stages of their retirement suffer a large loss that is then impossible to recover from. Instead, he says advisers should be dividing up the pool of assets into a short-term bucket that has low or no volatility, and then medium or longer-term buckets that can take more risk.
For DFMs to appeal to advisers they need to understand what the client’s needs are, adds Dow. “They need to think about how to build a portfolio for the retirement market,” he says.
Such a portfolio would have a broader mix of assets, more conservative assets, with some focus on growth but more on downside protection, says Dow.
However, DFMs say they are prepared for the market.
Liontrust’s John Husslebee says: “I would say we do have a product for pension freedoms, not neccesdarily a direct replacement for an annuity but for those clients or investors who are looking for flexibility I think we do offer it.”
The manager has 27 different model portfolios across 10 risk levels with income, growth or low-cost slants to them. “It’s the combination of those that creates the flexibility for clients,” he adds. “To some extent it’s like going to your local B&Q and mixing your own paint.”
Husslebee adds that rather than creating additional products, Liontrust just needs to create awareness of what it already has. “We think the model portfolio service we have designed, run, monitor, and maintain is suitable for pensions, there again it is flexible across many needs,” he adds.
While investing alone cannot replace an annuity, model portfolios are already equipped to deal with the new market, says Stewart Sanderson, head of relationship management at 7IM.
“Working closely with [investors] and their financial planner to understand future liabilities allows us to manage income streams whilst giving the capital every chance to maintain and grow it’s real spending value,” he adds.
”The importance of not making rash decisions and managing asset allocation for the long term has never been important, people have worked all their lives for this money and it’s important they seek professional advice to avoid pitfalls.”