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Decumulation advice – greater industry focus needed to cope with exponential growth

31 July 2019

Advisers have warned that there is not enough industry focus on decumulation, despite expecting the number of clients requiring advice in this area to rise.

According to research from Heartwood Investment Management, over three fifths (61%) of advisers said there is insufficient focus paid to decumulation, yet the overwhelming majority (86%) expect exponential growth in this area over the next five years.

Matt Hollier, head of product, Heartwood Investment Management, said: “Decumulation has traditionally played second fiddle to wealth accumulation in the financial services industry but this must surely change. Our study details the impact that tough headwinds can have on the growing number of clients entering retirement with less robust strategies in place.”

The study found that advisers see the three biggest challenges for clients seeking retirement as managing market volatility (67%); calculating a sustainable income (63%); and longer life spans (55%).

Some 85% of advisers said clients entering decumulation had expressed concern about the impact of Brexit on their money, while 60% believe their clients tend to overestimate how much income they can safely withdraw from their portfolios, with just 16% estimating the right amount.

Heartwood Investment Management said the findings highlighted the importance of managing sequence-of-returns risk, with as many as 97% of advisers noting that it can have a material impact on choosing an appropriate decumulation strategy and 38% describing it as having a ‘significant’ impact.

Hollier added: “Sequence-of-returns risk – the risk of getting poor investment returns in the early years of retirement – can be critical for clients taking an income from their portfolio. Simply put, if markets lose money in the early years, and clients are withdrawing an income, then they have a smaller portfolio to benefit from when the good years come along.

“Conversely, if the early years are strong, clients have a larger portfolio so when the bad years come later, the poor returns have less of an impact. Advisers need to address this risk within their dedicated decumulation solutions.”

Professional Paraplanner