Shades of grey: Retired clients need tailored investments

But as clients approach retirement, they start to transition from accumulation to decumulation. They need to prioritise capital preservation and income, and that means lower-risk strategies. Volatility becomes a bigger concern — especially if markets fall significantly in value soon after retirement, because it raises the risk of funds being depleted prematurely.

Advisers are not acknowledging different needs

We might expect financial advisers to recommend different strategies for these two groups. But a survey conducted by FT Longitude for BNY Mellon Investment Management finds that only 18 per cent of financial advisers use entirely different portfolios for accumulation and decumulation clients. The rest tweak standard portfolios for those seeking income, for example by holding a cash buffer or combining portfolios differently.

How do you approach investing for clients who are taking retirement income compared with clients who are still accumulating?

Delving into these approaches reveals that 49 per cent tailor a standard set of investment products to individual situations, and 48 per cent believe that the investment principles that guide accumulation and decumulation are the same, and 45% point to the need to ‘keep it simple’ so clients understand their investments (see chart 2).

Why do you use the same approach for clients who are taking retirement income and clients who are still accumulating?

“Advisers should educate clients that they need to do something differently,” says Christian Markwick, Head of Adviser Support at the Verve Group. “The client won't understand the requirement for a different investment solution, so there needs to be education. But the providers also need to simplify their solutions so that an adviser can understand them well enough to explain them to a client. That’s not always easy, because they’ve been built by actuaries.”

A diverse approach reduces risk

Making the right recommendations to retired clients is complex — and the consequences of getting it wrong are significant. “We work on the assumption that we've got to go through every storm that's coming,” says Andrew Moore, financial planner and managing director at Goodmans Financial Planning. “So we take an all-weather approach and use massive diversification to do that.”

Many advisers taking standardised approaches for clients in decumulation now have expanded options thanks to changing market conditions. The increase in interest rates in the past few years, for instance, means it is now possible to obtain higher yields on lower risk high-quality bonds.

Higher interest rates are also behind a renewed interest in annuities. Forty-six per cent of the advisers in the BNY Mellon IM survey say that lifetime annuities are one of the tools they use the most to develop retirement income approaches. This rises to 55 per cent when they look ahead to the next three years.

Which tools are you using the most to develop your retirement income investment approach today? And which do you expect to use most over the next three years?

There is no stand-out strategy that these advisers are using universally — they are basing their decisions on a combination of overall investment philosophy and individual client circumstances. “Advisers now have a lot more tools in their toolboxes to deliver good retirement outcomes,” says Richard Parkin, head of retirement at BNY Mellon IM.

Strategies need nuance

Some advisers are choosing a total return strategy: 14 per cent recommend it to all of their clients, while 27 per cent say they always recommend natural income. Others prefer a ‘bucket’ approach, which compartmentalises the portfolio into short-term, medium-term and longer-term components. This allows clients to draw down a certain level of their capital straight away while allowing the remainder to grow over time.

How often do you recommend the following investment approaches when advising clients investing for retirement income?

“We take a very strategic total return approach,” says Moore. “Our principle is that we're not here to preserve the capital. We're going to use it over a person's lifetime, and we're going to maximise the years where they actually get some meaningful use out of the money.”

Natural income, meanwhile, offers the potential for income to rise because of dividend increases, which can be particularly useful during periods of high inflation. Combining income-producing equities with high-quality bonds can lead to more balanced returns and lower volatility.

But natural income is not right for everyone. “If clients have already secured their minimum income, and they can afford to take a varying level of income thereafter, then natural income is great,” says Markwick. “But if you're asking a client to vary their income every year based on the natural income, and that may decrease below the amount of money they need, they will end up having to draw on capital.”

So developing retirement income approaches is nuanced, and advisers must take great care to consider individual client needs carefully. “Whatever solution you recommend will work for some, not others,” says Markwick. “You need to understand which client/ their personal objectives you plug into which type of solution.”

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