As Pension Awareness Day is fast-approaching, the bull market passes the historic milestone mark and retail investors re-dictate the terms of retirement, how do wealth advisers help their clients maximise returns while minimising risk?
Pension Awareness Day (on 15 September) is one to reflect on the current state of pension affairs, and raise awareness about the importance of investing for the future.
We cannot ignore the effects that our ageing demographic and shifting attitudes towards risk have on our future savings - but what impact does this have for advisers?
The modern realities of working life and retirement planning pose new risk considerations for wealth advisers. Gone are the days where retirement was all about hitting ‘that’ number before sitting back beside the pool to enjoy the rewards of a defined benefit (DB) scheme.
Instead, the changing work and pension environment means that people often retire much later into their careers and move through different stages of income generation. This fundamentally shifts how people plan for their retirement.
Despite the change in landscape, what customers want when they are setting aside funds for their pension has remained largely unchanged over time.Add to these factors a higher life expectancy, causing many to draw on their pensions for decades, and pension pots that are out of kilter with the large sums required to fund things, such as care in later life.
This presents several problems for advisers: how can they maximise returns for their clients, while recognising the risk adversity that is associated with uncertainty in long-term planning?
The answer to this is not as simple as investing safely. Being too risk-averse can bring its own problems too, such as the hampering of returns.
For example, the current trend of lifestyling and switching to cash can set a client’s portfolio back significantly since, in many cases, these low-yield investments will struggle to keep pace with inflation.
Seeking protection for a sustainable income in retirement
When determining the level of risk for a client, a balance must be struck with the appropriate level of protection. A strategy that ensures the right levels of risk as well as protection for a client, is often as much about wealth preservation and a need for steady income as it is about achieving a significant upside of returns.
Yet ensuring proportionate protection also comes with its own considerations. Once upon a time, constant proportion portfolio insurance (CPPI) was the go-to solution for such a strategy, but this soon lost popularity since, once a claim was made, the investor would be left sitting on a pile of cash for the remainder of the term, which could be as long as 10 years.
Similarly, the high and increasing cost of some protection products have had an adverse impact on returns over the long-term.
A holistic approach is crucial for finding a modern solution to this challenge faced by advisers, on how to best support their clients’ investment needs.
What does good protection look like?
It may seem obvious but central to finding a solution is fully understanding your client, so that the service provided is catered to their unique circumstances and risk appetite. When choosing the right strategy for your client, things to consider include:
- Protection that increases with the portfolio value, not simply on the initial investment itself. This can deliver the ability to lock in the upside rather than simply protect from the downside.
- Choosing a portfolio that offers volatility control, to minimise the impact of significant market shifts.
- Seeking lower cost protection - while historic protected portfolios had ongoing charges (OCFs) of circa 4 per cent, they are now available with OCFs of sub 1.5 per cent.
Despite the change in landscape, what customers want when they are setting aside funds for their pension has remained largely unchanged over time.
They are, for the most part, risk averse, or conservative in their appetite, seeking a certain amount of protection for some return.
In the changing work and pension environment it is up to wealth advisers to factor in the new challenges that this brings to approaching their strategies, to ensure that they deliver on their customers’ needs while balancing their appetite for risk and returns.
Mark Evans is business development director at Tavistock Investments
