When it comes to retirement planning, there are now a whole host of products and solutions available for advisers to choose from, and this can often be confusing.
For clients there is a myriad of jargon out there that means there is a real need for quality financial advice, particularly around the age of retirement.
People cannot afford to run out of money and rely on the state pension for income these days.
According to clients we surveyed recently, the second biggest fear when it comes to retirement is running out of money, just behind having issues with inheritance tax.
Decumulation as a topic is only going to become more prevalent as market volatility continues to provide investors with uneasy investment journeysHowever, there is a fear, nearly four years into the pension freedoms, that advisers still do not recognise they have what they need to help their client through retirement.
Whether this is because there is too much to choose from, or there has not been enough effort in explaining each product, is up for debate.
Nevertheless, decumulation as a topic is only going to become more prevalent as market volatility continues to provide investors with uneasy investment journeys.
As such, advisers must get to grips with what they have in their toolkit to recommend to their clients, and provide the quality advice we know they can deliver.
But with so many options to choose from, how can an adviser go about with confidence that they are making the right decision?
We count around seven or eight options and respective provider products on the market that say they can provide clients with a smooth investment journey and give them a retirement they deserve.
However the pros and cons can vary greatly, and not all will necessarily give advisers the peace of mind in what they are recommending.
Some of the biggest risks in decumulation are sequencing risk and pound cost ravaging.
If these are not mitigated against, then the effects on a pension pot can be devastating.
As such, while model portfolios and target return funds can deliver the flexibility people require in retirement, neither can control the two risks just mentioned.
Taking natural income from investments also falls into this category, but with far less flexibility.
Other funds, such as multi-asset strategies, can provide a bit more certainty and will give investors protection should markets fall significantly.
However, these again do not account for pound cost ravaging, and actually compound the issue by selling across all asset classes when a client wants to take income.
This means equities are being sold at the completely wrong time and will require even greater performance just to get back to parity.
This does not leave advisers with too many options. They could recommend alternatives, such as buy-to-let, but these are littered with complexities and should not be relied upon.
Annuities, on the other hand, tick a lot of boxes and most importantly give clients an income for life, but at what cost?
While rates are predicted to rise again in late 2019, they are still at low levels and offer people no flexibility.
All of these solutions may play a role in a client’s retirement journey, but none are optimal.
As a result, we are left looking to advisers for innovation.
We have seen an increase in advisers introducing the pots approach, having various buckets of investments that each serve a purpose – for example one to take income and one for capital growth.
This provides the adviser and the client with flexibility, liquidity, a diverse portfolio, the potential to leave a legacy and a cost effective solution.
This will also allow the adviser to address pound cost ravaging and sequencing risk. It may not pay a guaranteed income for life, but we are not going to find that unless you buy an annuity.
So why are not more advisers doing it this way?
This approach is fraught with inefficiencies when it comes to administration.
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, and as such advisers can get bogged down in the paperwork that is associated with it.
The challenge then is to mechanise the delivery of a service and remove the burden placed on advisers.
There have been a number of approaches to this, we ourselves launched a service to streamline the process for advisers last year.
But as an industry we must be look to help adviser service more clients efficiently and effectively, particularly at or in retirement.
It is time the industry listened to feedback from advisers on their decumulation planning challenges, and came up with solutions that make a real difference to the retirement income space.
Lawrence Cook is director at Thesis Asset Management
