Alasdair Wilson of Apricity Compliance, looks at Centralised Retirement Propositions (CRP), and how having a documented advice process for clients taking an income in retirement can not only help them achieve their retirement goals, but also streamline advice businesses by implementing efficiencies where appropriate.
A CRP is a document that outlines your firm’s processes, to be followed by all advisers, when dealing with clients in (or approaching) retirement and who are taking (or planning to take) an income from their pension.
The idea of a CRP came from questioning whether centralised investment propositions (CIPs) go far enough when applied specifically to managing clients taking an income. Indeed, a young client seeking long term growth from their investment will have an entirely different set of needs to a client in retirement looking to take a regular income from their pension. A CRP will generally sit alongside a CIP to highlight what your firm does differently for clients in drawdown.
Like a CIP, there are no hard and fast rules with what must be covered within a CRP, and will likely vary wildly between firms. For example, a CRP for a firm dealing with clients who are typically high net-worth will look very different to a CRP for a firm whose client bank is primarily made up of retired teachers. All a CRP should do is detail how your firm manages clients in decumulation differently from those in accumulation.
This could cover anything from the early stages of the advice process, such as a supplementary retirement fact find; through detailing differences in risk profiling, capacity for loss assessment, retirement income-specific investment strategies, all the way to how the ongoing review process differs. You can even include details on how certain software tools are used to help your advisers deliver their recommendations.
Risk profiling within a CRP
Many will argue that agreeing a risk profile with a client in decumulation should be approached very differently to a client in accumulation, and should focus a lot more on a clients need to take risk rather than just investing in line with their questionnaire result.
For example, if a client has a large pension pot of £750,000, but only requires a modest income of a few thousand pounds per year to maintain their standard of living, would it really be appropriate to keep the pot invested in line with their adventurous questionnaire result, and targeting net returns of 8%+ per annum?
Within a CRP, you can outline and document your firm’s specific approach to managing investment risk for clients taking an income to ensure you have their best interests in mind.
In short – any strategy that works well for your business and, most importantly, your clients.
This is still an area that is simmering away with new discussions, insights and suggestions for how best to manage clients relying on their investments for a regular income. The main theme, however, is usually how to manage volatility in order to reduce sequencing risk (or pound-cost averaging). For platform clients, a multi-pot strategy may be the most effective, with their main pot waterfalling a certain number of years’ income into a lower risk pot, which in turn spills over into a cash pot with 1 years’ income.
Some funds and portfolios offer tactical asset allocation, which allows the fund or portfolio manager some leeway in how to position the fund with the aim of reducing volatility in turbulent markets. Other funds or MPSs are benchmarked against a CPI-Plus model, meaning a safe withdrawal rate could feasibly be implemented.
A CRP is just a place to document your firm’s approach, or approaches, to managing a client’s income; and to ensure your advisers are all working from the same page to provide your clients with a consistent service.
The need for regular contact is increased for clients in drawdown as, whichever strategy you choose beyond an annuity, its success is dependent on the performance (in both growth and volatility terms) of the underlying investment fund.
However, there is no mandated number of drawdown-specific reviews that should be conducted over the course of a year.
Some strategies, such as the multiple pots, will require a much more hands-on approach to manage, meaning it will essentially cost your firm more through the amount of time spent shifting funds around, and reviewing this with the client potentially multiple times a year. Other strategies might only need monitoring as part of a client’s annual review, meaning they cost less to your firm to offer.
Outlining your firm’s drawdown review processes in a CRP also ensures all advisers are offering a similar service to similar client types. Without this CRP guidance in place, for instance, some advisers may be holding monthly client meetings whilst struggling to maintain a pot strategy for them; while another adviser dealing with a client with similar needs might only review their tactically-allocated fund once per year, which has worked very well in comparison.
By outlining time-appropriate strategies that work for your firm and clients, this is where CRPs can really help highlight efficiencies in your business.