By Fiona Tait, Technical Director, Intelligent Pensions
If anything, current conditions only highlight the limitations of investment strategies necessarily pitched at the lower end of the risk/reward spectrum and based on the ‘average’ investor.
The upside
Following an investment pathway is still a lot better than leaving it all in a cash fund. For most people retirement is a long-term situation and the readers of this publication know better than most the depredations that even ‘normal’ inflation can make to purchasing power over 20-30 years. In addition, investment pathways oblige people to think about the issue of access, when and how they intend to take retirement income which is also positive.
The investment pathways are run by professional fund managers in line with defined risk parameters, with their investment objectives clearly laid out. The chances of successful long-term performance in line with these objectives should therefore be very good. The problem is that these objectives may not necessarily be the most suitable target for many of their investors.
One size fits all
In any walk of life having a plan which is focused on specific objectives improves the chances of success. However, pension savers who have reached the point of retirement, are likely to have very diverse requirements with different priorities for current and future income, as well as provision for family members. Financial advice allows clients to focus on what they most want, rather than what everyone else wants.
Another consequence of a standard approach is that the model tends to focus on the lowest common denominator. Both default funds and investment pathways tend to be low risk, thus avoiding the prospect of significant losses which could lead to questions and complaints. This approach is understandable but limits the possible upside for people with potential investment horizons of over 20 years, some of whom also have other sources of income and are not reliant on their pension to supply their total income needs.
A bespoke portfolio caters for income provision as well as capital growth and can ensure there are appropriate assets in place to support planned withdrawals. Financial advisers will also focus on how much risk an individual needs to take to achieve their income goals and adjust their equity exposure accordingly. Client-specific Attitude to Risk and Capacity for Loss values ensure that their expectations may be managed with regard to the potential for both positive and negative returns.
Adjusting to change
Following guidance from the FCA, investment pathways focus on a 5-year investment horizon which may encourage people to think that the fund can be ‘left to get on with it’ without any further engagement from the policyholder. It is possible to switch out of, or between, pathways during this period, but it requires a level of proactivity on the part of the investor. It seems likely that many will stick to a ‘plug and play’ approach regardless of what happens to their fund.
Advised clients on the other hand are likely to receive annual reviews as well as individual updates when market conditions change.
This encourages them to consider if their funds have performed as expected and whether changes need to be made to their strategy.
Income needs are also likely to change during the initial retirement period, and this is even more likely when there have been additional pressures on the client’s finances. Clients may need to dip into their pension fund earlier than expected to support increased or unexpected but necessary expenditure. If this happens to an advised client, the investment strategy may be adjusted to reflect the fact that it may need to work harder to make up for the greater withdrawal rate, under an investment pathway such nuances are less probable.
The value of advice
What this all adds up to is that more people approaching retirement should be encouraged to take professional advice. Mid-life MOT, signposting and the Money and Pensions Service are all geared towards this outcome and yet the take-up numbers are still very low, perhaps indicating a lack of real belief in the value of financial advice. There are obvious drivers for advisers to promote this message, but it would be extremely helpful if government and trustees were to really get behind it too. If an individual only takes advice once in their life, there is a very strong argument that this is the time they should do it.
|
