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Malcolm Kerr: Advisers must act earlier on sequencing risk

Malcolm_Kerr_EYIFAs have a responsibility to track clients’ drawdown requirements and attempt to mitigate sequence risk

I have had a relationship with my IFA for more than 30 years. During that time, I would estimate he has received about £50,000 in commissions and fees. I am not complaining; it is my choice to continue to be a client and, at the moment, it is working OK. However, when he comes to sell his business, I shall certainly shop around. Interestingly, a number of my pals are in similar situations.

As we move into deculmination, we think about adviser fees in a different way. Instead of looking at the cash sum in relation to the size of the fund, we find ourselves looking at them in relation to the size of the income. So half of 1 per cent turns into, say, 10 per cent.

I am looking more closely at all the costs I am paying and the value I am getting.

My IFA has arranged for my Sipp to be managed by a discretionary fund manager and the performance against the low-risk benchmarks the three of us agreed is fine. Most of the investments are in direct securities rather than funds, and the DFM charge is 40 basis points. I am not complaining about that either. So what is the problem?

A couple of months ago, I emailed my IFA with regard to the income drawdown payment planned for March/April 2019. It is the first one which will incur tax, so it will be larger than in the past and I also need to ensure I do not end up paying more than I need to.

I do not consider myself an investment expert – far from it. But in the note, I asked whether it might be sensible to liquidate some assets now, given the state of the markets. He agreed. As did the DFM.

So my 2019 drawdown fund is now in cash, earning almost nothing, which is fine with me. And my DFM and IFA know that I will take full responsibility if I miss any market bounce over the next few months.

But here is the thing: what fiduciary responsibility does either party possess to have been more proactive in this situation? Should they have contacted me six months or three months ahead of the drawdown date? I do not know. How many clients know?

I have no idea what my IFA agreed to do for me in return for the ongoing fees I pay. In fact, back in the day, he was just getting trail commission from the providers.

Since then, I think there has been a promise of two review meetings a year but I cannot remember what else. Certainly, there is nothing in writing that promises to constantly monitor my fund and try to mitigate the dreaded sequence risk.

Should all advisers be on top of all their clients’ drawdown requirements and attempt to mitigate sequence risk when the upside looks less likely than the downside? Or should they at least have a discussion with their clients? I think the answer is yes.

Recent data suggests many clients are taking more than 4 per cent drawdown from their pensions.

Of course, if they are taking a fixed sum and the performance is lagging, some are going to run out of money (and talking of performance lagging, let us not forget the impact of charges can be more than 2 per cent).

So I think advisers do have a responsibility to intervene early, calling a meeting or discussion with each client every year before any drawdown is due.

A small sample of pals who, like me, are in drawdown suggests this does not always happen, particularly with automatic arrangements. Clearly, there is a cost attached to the sort of service I have described.

But to put this into perspective, if a client aspires to a gross income of £20,000 from their pension fund, that fund needs to be £500,000.

At 50bps per annum, the adviser will already be charging an annual fee of at least £2,500, possibly £5,000. So it does not seem too much to ask.

Indeed, it is very important. If a client runs out of income, this will have a huge impact on their life.

Not only that, they may also look for someone to blame. This could have serious consequences for advisers not able to provide the documentation that demonstrates how well they have communicated with their clients. It could also damage the financial adviser brand.

Of course, if a client has a fund of, say, £100,000 and the adviser fee is £500 then the service I have described will be challenging to deliver at a profit. But funds designed specifically for drawdown are gaining significant traction.

I hope we will see more of them emerge. And I hope advisers will be a little more open-minded when comparing them with their existing portfolio recommendations.

Could the inherent characteristics of these “retirement” funds and their reduced volatility mitigate the need for early intervention?

Malcolm Kerr is an independent consultant



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There are 4 comments at the moment, we would love to hear your opinion too.

  1. I think you mean decumulation?

  2. richard 13th November 2018 at 3:04 pm

    I think you are taking this far to lightly. The combination of low risk investments and having to sell equities to provide the income stream does not just add up. Far too many advisers use the same investment strategies for both the accumulation and decumulation stages of pension planning which is a disaster waiting to happen. Having no idea of the processes being used when it is your future lifestyle at risk is really scary.

    Sack your adviser and find a drawdown specialist!!

  3. Very dangerous to try to judge when to disinvest and then reinvest. Many have tried it and the consensus opinion seems to be that it can’t be done (successfully). Diversification and weathering the inevitable periodic storm is a better approach. That and, of course, avoiding fixed withdrawals. Always go for a percentage of the value of the fund.

  4. I read that neither the IFA nor the DFM both have a clear understanding about the mechanics of how to make sure that Malcolm as the investor does not outlive the income his portfolio can deliver.

    Malcom you would do well to read Beyond the 4% Rule by Abraham Okusanya. If you are still not convinced then find a planner who can serve you correctly.

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