The majority of paraplanners believe clients in decumulation require different investment advice to clients in the accumulation phase.
According to a recent Parameters survey by Professional Paraplanner, 60% of paraplanners say decumulating clients need different advice, compared with 25% who said they do not require a different approach and 14% who were unsure.
Those who felt it was right to take a different approach cited the need to look more at sustainable income rather than capital growth, with a focus on investments that are lower-risk than those used for younger clients.
One commented: “The level of assets and amount of income withdrawn will naturally have an impact, however, careful consideration needs to be made to ensure that the client is able to sustain their income and maintain their standard of living. The capacity for loss and ability to sustain market fluctuations diminishes dramatically when the client becomes reliant upon their savings.”
One paraplanner said they take a “lifestyling in reverse” approach and have adopted a three-pot rule for decumulation clients; two years cash, a mix of defensive and multi-asset funds, and a MPS for growth.
Another said: “These are two very different investment objectives so require tailored and appropriate advice based on individual needs and requirements. Fund selection and fund longevity is also a very different consideration for decumulating clients.”
The use of cashflow modelling was also more likely to be used to show the client how their money will fulfil their needs over the decumulation period, with paraplanners agreeing that decumulating clients may need regular income or ad-hoc withdrawals and should be educated on the effects of withdrawals.
However, others argued that the advice approach depends wholly on the client’s circumstances.
One respondent told Professional Paraplanner this should include: “Not just their pension income and expenditure but the whole later life and estate planning objectives, the needs of dependents, and the possible need for care, or do they just want to spend every last penny that they have before they die? Some clients will need a different portfolio for decumulation, some will be happy to remain in a growth portfolio to try to outlive their wealth.”
Another said the investment advice should be fairly similar across both phases, with a core focus on growth: “The answer depends on the client’s circumstances, life expectancy, attitude to risk, capacity for loss, income need. But generally speaking, whether the objective is aiming to grow investments to help maintain a certain level of drawdown over the long term (whether or not that drawdown can be financed from investment income or needs to take from capital as well), or the objective is maximising long term returns in accumulation, the investment advice should be fairly similar i.e. best approach for obtaining total return over the long term. The advice may be slightly different but not totally different – the main aim is still going to be growth whether accumulating or decumulating.”
Others noted that there is evidence to suggest that a higher risk appetite in retirement, potentially the same approach used in the accumulation phase, is more likely to provide sustainable income than a lower risk approach.
The survey showed a wide disparity in the use of Central Retirement Planning systems for clients, with only 16% choosing to use one, while 75% do not.
The overwhelming majority of paraplanners (82%) also said they do not change the risk profiler they use for clients in decumulation, with just 11% stating that they do.
One commented: “We continue to use the same risk profiler, but would ordinarily retain cash of circa 2-3 years of expected income to see out a decline in the market should it happen.”
Another noted: “The risk profiling question remains the same, however the capacity for loss would differ. When determining an appropriate risk mandate, we would use the risk profile as a starting point but not as a set-in stone result.”
It was a view echoed by a fellow paraplanner: “Some risk profilers do have the option to select client type before conducting a risk questionnaire, for example growth, natural income, regular income. But selecting regular income/sustainability effectively gives a lower risk profile than for an accumulation client, and all a risk assessment does is quantify an underlying risk profile. Discussion with the client is always the most important to establish whether the underlying risk level is appropriate to their personal views and individual situation.”
However, one respondent told Professional Paraplanner their firm uses a decumulation matrix based on risk profile and time horizon which is centred around volatility bands and a cascading pots approach to fund income and topping up cash.
