As the clients of financial advisers age, their needs change. Those who are earlier in their careers are likely to be focusing on accumulation: they are saving and seeking to grow their wealth. These clients will tolerate higher risk in exchange for higher returns — volatility is less of an issue than for others, because they can afford to take a long-term view.
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?
