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Financial planning not provider product is decumulation solution

16 November 2020

Increased risk of consumer harm will bring the decumulation stage of clients’ wealth journeys into the spotlight from now on, says Lawrence Cook, head of Intermediary Distribution, Sanlam.

The FCA review of retirement income advice being a manifestation of that greater scrutiny and a warning shot across advice firms’ bows.

Yet few advice firms have fully got to grip with the issues with any “enthusiasm”, he argues, saying firms seem to fall into three categories:

1. Those that don’t fully understand what needs to be done.

2. Those that understand the issues but feel they have them covered.

3. Those that understand the issues and are trying to do something about them.

“The latter two categories appear to be quite a small percentage of the adviser community. And it’s only occasionally that you come across a firm that has read all the documentation and has developed a suitable advice proposition.”

Cook says there is “a lot of noise” in the market around decumulation and risk – sequencing, inflation and mortality – particularly from product providers offering a product ‘solution’ to these risk issues.

“That is a risky path to go down,” Cook says. “The solution has to be advice led. In fact, decumulation is tailor-made for financial planning. Anyone looking for a product solution will be disappointed.

“We are living in a sophisticated investment environment with advanced asset allocation models and thousands of funds at the disposal of financial advisers, and the solution lies in a really good financial plan that can manage the various risks in the short, medium and long term. That requires confidence in advisers’ abilities as planners and strategists for the client, which means you need the software and the technological back-up to be able to model the plan and talk about the probability of a financial plan actually achieving its objectives for the client.”

Intuitively, advisers have been putting 2-3 years of income into cash and topping that up on a rolling basis, he says. “But often that has been done without any science. Stochastic modelling will tell you cash is the worst performing asset class and if you have too much in cash you are worsening the odds of your plan working. It can be a short-term bias.

“There is a lot of focus on volatility, but volatility isn’t the enemy per se. Persistent loss of capital and its long term effect on the client’s lifestyle is the enemy.

“For paraplanners, coming up with the strategy and identifying the percentage chance of the strategy working, of meeting the client’s goals and providing income through their retirement, is where the value is delivered to the client; the fund or product selection is a small part of the overall recommendation.”

Cook suggests there is an educational journey for the client which must also be addressed by firms and reflected in suitability reports. “Unless the client is buying an annuity we cannot say ‘this will be your income for the rest of your life’. All advisers can say is that they have a high degree of confidence that the plan will meet the client’s objectives.”

One of the key issues for clients Cook points out, is that sequencing risk and pound-cost-ravaging and so on are invisible. “These pernicious effects are not seen on investment charts and as such, they are easily ignored in the financial advice process.”

Even where advice firms have established central retirement propositions (CRPs), he adds, the proposition has to be seen not in terms of a product which can be dropped on to the client’s situation to resolve the issues but as an advice framework which advisers can use to create a tailor-made solution for the client.

Cook concludes that putting in place a financial planning proposition that effectively deals with a growing percentage of the advised client demographic, tackling these issues in the right way, using the right tools, must be a key area of focus for advice firms going forward.

Professional Paraplanner