A traditional approach to financial planning – where an investment outcome is dictated by an assessment of the client’s risk tolerance – is unsuited to producing effective solutions in the post-retirement phase, according to a leading investment consultant.
Lukasz De Pourbaix, general manager of investment consulting for Lonsec, says the structural deficiencies are not the fault of financial planners, but simply reflect how the system has evolved to date, reflecting client demand. But that demand is shifting.
“One of the challenges is that there’s a standard financial planning process,” De Pourbaix says.
“The components of that process have been very much geared towards the accumulator market.
“A good example of that is risk profiling which, one, is required – advisers have to do a risk profile – but [two], it also drives the investment outcome for the investor.”
De Pourbaix will be a panellist at the Conexus Financial Post Retirement Conference in Sydney on March 4, as part of a session on education and advice solutions. Other panellists are Michael Monaghan, managing director of State Super Financial Services; Matt Englund, managing director of Securitor & Licensee Select at BT Financial Group; James Grant, executive manager of wealth management for Industry Fund Services; and Matt Lawler, chief executive officer of Yellow Brick Road Wealth Management.
The conference is aimed at financial planners seeking insights and the latest thinking in crafting post-retirement solutions for a growing proportion of their client base.
Competing objectives
De Pourbaix says a challenge with the traditional approach to financial planning is that it can struggle to reconcile the “number of different objectives, sometimes competing” that clients in retirement typically exhibit.
“The risk questionnaire really only measures one thing: what’s the investor’s ‘willingness’ to take risk?” he says.”
“What it doesn’t take into account is how much risk do they need to take to achieve outcomes?
“There’s a bit of a disconnect and what tends to happen, and I know this from discussions with advisers, is you do this risk profile and a client comes out at, let’s say hypothetically, ‘balanced’. Then the client is going in to retirement or is retired and has an income objective of x, they may have a capital objective of y, and they want to maybe leave some bequest at some stage.
“How do you match those things together? The reality may be that depending on the individual’s circumstances, some clients may need to take on more risk; others may not need to take as much. Or, clients may need to reprioritise those objectives.
“That’s just an illustration, but the challenge is that the process itself…needs to be adjusted. You do not need to be revolutionary about it; just augment it with some other things that I think would make the connection between the retiree objective and things like the risk profile more relevant.”
Portfolio construction
De Pourbaix says the “structural impediments” of the financial planning process lead to some issues in terms of portfolio construction.
“Products have been geared to the wealth accumulators; advice has been geared and event the consultants in the market have been geared towards wealth accumulation,” he says.
“It’s only now that you’re seeing the superannuation funds starting to have a look at how do they retain clients after they retire, so you’re seeing those guys spend a lot of time now saying, well, what are the different options out there for retirees?”
He says effective solutions will only come from “industry as a whole [investing] time and money to ensure even big things, like what are the systems that support investment strategies, are they capable of being structured in a way that you can measure outcomes for clients more adequately”.
