10 Jan 2024
The future of decumulation advice
Robert Vaudry, Managing Director, Copia Capital
When the FCA sent out a second questionnaire to advisers as part of its thematic review of retirement income advice, the implication was that the information it had received so far hadn’t put the issue of decumulation advice to bed.
The review, which kicked off in June, first asked 1,300 randomly selected advice firms nearly 90 questions about charging models and fees to establish whether firms are charging differently for clients in decumulation compared to those in accumulation. The follow-up survey is far more specific on fee models, target markets and investment suitability.
I found the questions around investments particularly interesting. The information request asks firms for details on a whole host of processes and procedures such as:
- How do they correctly align portfolios to customer risk profiles in decumulation?
- What criteria is used to ensure investments are suitable for producing income to meet the customer’s needs?
- How do their income withdrawal strategies help to mitigate relevant risks?
- Do they have the flexibility to adapt to customers’ different needs or changing objectives?
We’re yet (at the time of writing) to see any output from the review. But I think the direction of travel is clear. Firms either need to have a dedicated Centralised Retirement Proposition (CRP) or be able to demonstrate that their Centralised Investment Proposition (CIP) is fit for purpose when advising clients in decumulation.
Retirement risks coming under the spot light
This is in line with existing regulation, where Consumer Duty requires firms to ensure that they avoid causing foreseeable harm. It’s well known that the risks faced in retirement are very different to those in accumulation. When building wealth, the main goal is to deliver a real return on investment and beat inflation. When taking an income from investments, factors like longevity and sequencing risk become much more important, along with a greater need for certainty of outcome.
In rising markets, these risks are less problematic. However, the market volatility we’ve seen recently with poor performance from both equities and bonds, along with rising interest rates and high inflation, has brought them to the fore. There are already people in retirement facing the real risk of running out of money in later life and the situation is only going to get worse. With the reduction in defined benefit schemes and falling home ownership, more people will be reliant on investment income to fund their lifestyle in retirement.
What this means for advisers and the industry
I think advice models must accommodate the different needs of those in accumulation and decumulation. Many advisers I’ve spoken to agree – in a Copia poll last year, half (52%) felt that the FCA’s thematic review should recommend using a different investment approach for clients in decumulation compared to those in accumulation.
Of course, this isn’t all on advisers. Including greater flexibility in financial plans and using different types of wealth, not just pensions, but ISAs, GIAs and housing equity, for retirement income, requires better support from providers. And there should be more innovation from fund managers with investment propositions designed around the needs of clients seeking retirement income.
The recent correlation of bonds and equities has proven the traditional 60/40 bond/equity portfolio to be unsuitable for investors in decumulation. Poor investment performance before or during early retirement can force investors to rethink their plans, work longer or face a lower standard of living. By using investment approaches purpose-built for decumulation, advisers and their clients can mitigate some of the specific risks faced.
This could include using funds with exposure to alternative assets, typically including hedge funds, infrastructure, real estate and commodities. This can help provide downside protection and generate absolute returns during periods of stress. Although these products can be higher risk than more traditional assets, reducing the potential for equity and bond correlation can prove particularly useful in decumulation portfolios.
Decumulation risks can also be managed using guaranteed income as an asset in conjunction with a purpose-built managed portfolio. As part of a dedicated decumulation portfolio, guaranteed income producing assets pay a guaranteed income for the life of the client. This means fewer assets need to be sold in unfavourable markets to generate income, allowing the investment part of the portfolio to stay invested for longer. It can also be weighted slightly more towards equity and alternatives and slightly less towards bonds, offering greater potential for growth without increasing overall risk.
We currently offer two portfolios designed for clients in decumulation: Copia Select: Retirement Income, which has a greater allocation to alternatives, and Copia Select Retirement Income Plus (RI+), which includes a guaranteed income solution. Contact our sales team if you’d like to find out more about how these portfolios can support your client’s investment needs.
Shortly, we’ll be launching our retirement roadshows. Along with our partners at Wealthtime, we’ll be heading to nearly 20 destinations for CPD-accredited and expert-led discussions about retirement planning now and, in the years, to come. Register your interest and we’ll be in touch as soon as bookings are available.
We’re also working with the Lang Cat to produce some invaluable insight into what firms are doing now and what they need going forward to provide the best outcomes for clients approaching and in retirement. Come back in March to get your hands on the publication.
This article is intended for professional advisers only. Not to be distributed to, nor relied on, by retail clients. Past performance is not an indicator of future performance and current or future trends. Copia does not provide advice, advisers must seek their own compliance/legal advice before relying on the information provided in this article.