Many of the traditional tools used by financial planners to set retirement income strategies just aren’t up to the job any more. And as strategies evolve, they demand new, innovative and flexible product solutions.
Technology continues to evolve to allow far more complex strategies to be developed and implemented. The optimal path from employment to retirement is different for everyone; financial planners need to be able to cater to that range of scenarios – shoehorning clients in to a limited range of strategies or portfolios just doesn’t cut it any more, if it ever did.
And it means that now, more than ever, planning for retirement can’t start at five minutes to midnight; and it has to be an ongoing process throughout an individual’s retirement.
More information on the Conexus Financial Post Retirement Conference
Kicking the bucket
When risk is defined and measured in new ways, some of the traditional approaches – even some of the newer ones – can be called into question. One such strategy is the so-called “bucket strategy”, which involves an individual setting up a series of “buckets” – really, individual portfolios – with a specific objective for each: for example, one to meet day-to-day cash-flow needs; one to create a lump sum to pass on to the grandchildren; and so on.
Milliman has analysed this strategy and its objectives for generating returns and managing risks.
“And the outcome of that is if you assume that there is a lot of long-term mean-reversion in equity markets, then yes, it’s a naturally very good strategy,” says Milliman senior consultant Craig McCulloch.
The problem is that even looking back over 100 years of data, the evidence for mean reversion is sketchy.
“Which doesn’t mean [buckets] are a bad thing; they can have very good impacts when it comes to doing things like managing behaviour and making sure that people focus on their cash bucket for income, that kind of thing,” McCulloch says.
“But…the question I have for those kinds of strategies is, are they actually a tool for doing what they’re intended to do or are they a nice cookie-cutter [solution]?”
Developing new tools
The tools that financial planners are developing to meet clients’ requirements need to be relevant to, and understood by, those very clients, says Dan Miles, a director and co-chief investment officer of Innova Asset Management.
“What is risk to a client?” he says.
“We talk about volatility; we talk about maximising Sharpe ratios and tracking error. Clients don’t give a rat’s arse. CPI- plus – do they really care? Make sure you don’t lose my dough. Make sure I’ve got money at the end of it.”
Todd Kennedy, a senior portfolio manager with Plato Investment Management, says an adviser’s kit has to contain the right tools. For example, a tool based on an arithmetic mean of volatility or returns may not produce the expected result.
“Do these tools incorporate sequencing risk?” he says.
“My assumption would be [they use] static numbers for a return expectation and volatility. The real world isn’t static. We experience geometric returns – and everything I’ve seen is arithmetic. So there is a fundamental mismatch between inputs and experience.”
Role of advice
Financial planner John Cameron, principal of Black Swan Event Financial Planning, says too much modelling of retirement income is “done with a long-term asset accumulator in mind, not with a retiree who’s drawing down”.
“Stuff changes every six months and I think a lot of those asset weightings…for the different risk profiles, are really done on the basis of wanting an asset accumulated,” he says.
“And they should be pretty much irrelevant to somebody who’s drawing down. The maths becomes completely different when you start drawing down, not putting in.
“The other thing too, I think, in the industry there is a language we use, when we use the language of ‘long-term average returns’ and so on. That’s not what [clients] see; and I think the other thing that leads into [this] is the need for ongoing advice in retirement. You know, it’s just as important as the initial advice.”
Consultant Paul Maddock says the key to good advice lies in “explaining risk to clients in a way that they can understand [while] not compromising on the information”.
Rethinking profiling
Lukasz de Pourbaix, general manager of investment consulting for Lonsec, says there’s a very clear shift in how financial planners approach retirement strategies, and they’re moving away from traditional risk profiling.
“A lot of clients that we’re working with are thinking about what types of strategies do I have in my portfolio that can manage those risks that are relevant to all clients, but certainly to retirees, such as market risk, inflation risk et cetera,” he says.
“And in most cases they still have a risk profiler, but the risk profiler is not a straight line to the asset allocation outcome. It’s part of the process…and I think that’s a real trend.”
New advice models
Ian Knox, managing director of Paragem, says an objectives-based approach to retirement planning is becoming more feasible as the nature of advice changes.
“I really do believe that we’re going through an era where advice is finally being defined the right way,” Knox says.
“If you look at the last 25 years to where we are today, certainly 15 to 20 years ago, a lot of it was putting investments into managed funds.
“We understand that. The truth of the matter is, you weren’t financially rewarded putting people into cash. You were rewarded for putting people into growth assets, and that is a fact.
“And I think that’s beginning to come through. People will be more comfortable, increasingly, with putting the value of advice to the fee versus the fee connected to the asset allocation and the reward that goes with that.”
Designed for advisers
Paul Maddock, Craig McCulloch and Dan Miles are among a top line-up of speakers and presenters on Day 2 of the Conexus Financial Post Retirement Conference on March 11.
Day 2 of the Post Retirement Conference – produced by Conexus Financial, the publisher of Professional Planner – is designed for financial planners and advisers, and covers topics ranging from the issue of when “post retirement” actually starts for most clients; legislative and policy developments in Australia and overseas; product design and evolution; goals setting and portfolio construction; estate planning; and how to help clients deal with the “retirement blues”.
It features a line-up of first-class speakers and panelists, including: Accurium consulting actuary Doug McBirnie; Macquarie Bank executive director David Shirlow; chief investment officer of the investment solutions group of State Street Global Advisors Dan Farley; Colonial First State general manager of advocacy and retirement Nicolette Rubinsztein; EY partner Steve Nagle; Equity Trustees national manager of estate planning Anna Hacker; lawyer and Your Estate Plan principal Bryan Mitchell; Strategy Steps director Louise Biti; My Longevity director David Williams; Prova director of psychological services Steve Smith; executive coach and clinical psychologist Tim Sharp; Challenger chief executive of distribution, product and marketing Paul Rogan; and CFS general manager of product Peter Chun.
The Post Retirement Conference has been accredited for 6.5 CPD points by the Financial Planning Association of Australia (FPA)*. Full details, including the agenda are available at the event website.
