These are questions Kirsty Anderson – Business Development Manager, Prudential UK is always being asked. But we should consider whether they are the right ones, she says.
A Centralised Retirement Proposition, or CRP, seems to be the new talking point in town. No surprise really, considering the market has turned on its head in the last five years and we have more clients than ever going into drawdown. Whenever I talk about the concept of a CRP, however, I’m always asked the same things: What exactly is a CRP and why do I need one?
So let’s start at the beginning and forget about CRPs for a second. Let’s consider a Centralised Investment Proposition (CIP). This is where, to quote Adele, I turn the tables and start to ask a series of questions with the most common or frequent answers listed:reminder of the restrictions surrounding gifting for IHT purposes.
You can see where I’m going with this.
What we ultimately think advisers need to consider, is if their existing CIP needs to be reviewed and developed to reflect the differing needs of their retirement clients.
The main consideration for clients in accumulation, is really how much risk they’re prepared to take – that tends to be the starting point in the advice process. For clients approaching and entering retirement, however, that question comes later on, and this is why it’s important to consider that a CIP, for me, really is about the client’s attitude to risk.
A CRP, however, is so much more – there are two elements in my view. Yes, you need the right investment solution but is their attitude to risk the driving factor? Probably not. Advisers know their clients and it’s unlikely their attitude to risk is going to change overnight – but what is going to change is that the event they’ve been saving for is here. It’s right in front of them. They’re making plans or assumptions based on the amount of money they have right now – can they really afford or are they prepared to take the rough with the smooth now, in the same way they did when this event was way off in the distance? For most clients, probably not – and that, I believe, should be the driving factor here. It isn’t their attitude to risk, it’s their capacity for loss… or ability to bear loss, as the regulator now refers to it.
A layered approach
Investment approach is therefore one layer of a CRP and should be driven by the client’s ability to bear loss, rather than their attitude to risk. If your client is approaching or enters into retirement, are they genuinely comfortable with the same investment solution they’ve been in throughout their accumulation period? Do they understand the investment risk that comes with this? If they suffered a fall in the market just before drawing an income or once they start, do they understand the impact this would have? Is this sustainable? Attitude to risk is still part of the consideration, but capacity for loss becomes the real driver.
The second strand of a CRP is your process. Elements of this include evidencing the client’s income strategy and stress-testing the solution put in place – but this is a whole other article in itself!
So, what is a CRP and why do I need one?
It’s a way of clearly demonstrating the consistent approach your business takes for all drawdown clients. While putting in place investment solutions that reflect the risks associated for these clients – and the governance within your business around these.
I suppose the question really is – can you afford not to have one?
