What advisers should know about the FCA's investment pathway rules

  • Explain the background to the investment pathway rules
  • Identify the implication of the rules for firms
  • Explain how firms can differentiate their service

Target date funds may well work as a default strategy for the non-advised market, but advisers can demonstrate their value by taking a much more client-centric approach and building a proper decumulation strategy.

In particular, advisers can consider risk-managed decumulation funds which manage risk on a monthly rather than annual basis, which helps to ‘micro-manage’ volatility to smooth out monthly performance and mitigate sequencing risk, such that the timing of withdrawals from a retirement account will have little impact on the overall rate of return available to an investor.

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For many years, advisers have been able to research solutions that distribute an income and advise on portfolios that enable the client to take their regular withdrawals from cash.

However, researching solutions from which it would be suitable to take regular monthly withdrawals by encashing units has always been more challenging and time consuming.

Risk-managed decumulation funds are more intensively managed and command higher fees, and thus the challenge is to avoid comparisons with other potential recommendations which can appear more attractive because of lower charges. 

In the rising market environment since the 2015 pension freedoms, decumulation portfolios have compared unfavourably with accumulation counterparts on traditional performance measures that do not take into account a client’s monthly income needs.

In any direct comparison of this sort, decumulation is always going to lose out because sacrificing longer-term returns for short-term volatility control means that something has to give.

I believe this has prevented the bulk of decumulation portfolios launched in the last five years from realising the market share they deserve, because advisers have faced difficulties making like-for-like comparisons.

Dynamic Planner has adopted a ‘purple badge’ system to enable advisers to navigate RMD funds more easily, as well as specialist Income Focused Fund Research and ‘cascading’ solutions as part of the full suite of possible advised solutions.

Managing conflict

Many advisers will be suspicious of provider’s motives around investment pathways.

There will inevitably be at least one case where an adviser feels their client has been ‘poached’ by a provider.

Personally, I’m inclined to trust that providers simply want to do right by their customers, and that this new initiative will work to provide investors with access to simple solutions and reduce the number holding cash for the long-term.

Instead, financial advisers should see this intervention as a real chance to demonstrate the value of advice to existing and prospective clients.

Pathways can help, but deciding which product is the most efficient to withdraw from; exploring the tax implications of those decisions; adjusting to changing markets and changing personal circumstances such as the client re-entering employment - all of these considerations and potential complications demand a skilled adviser, who can quickly analyse and recommend the best solution for their client.