The challenge and opportunity for advisers specialising in retirement advice now and in coming years will be defined by greater consumer-led demand for advice and solutions in this area alongside a complex and challenging investment environment, a panel has explored.
It’s this growing need for advice among clients shifting into retirement phase – as the country’s demographic profile further inundates advisers – that has advisers looking for effective ways to facilitate capital preservation at the same time as maintaining some access to liquidity and regular income, Liz Hughes, founder of Wealthspring Financial highlighted.
An adviser who specialises in providing advice to retirees, Hughes noted her use of the bucketing approach to managing the contradictory needs of her retired clients.
“The bucketing strategy was extremely effective to calm my clients during market downturns where I can say ‘yes this is happening, but we have at least 2-3 years of cash and we can draw down on fixed income after that so it will be many years until you have to touch these assets to ensure you don’t have to sell low. This was the kind of conversation I’d be having at almost every client meeting,” Hughes said on a panel at Professional Planner’s recent Best Practice Forum.
Hughes was joined by Paddy McCrudden, Magellan’s head of retirement solutions and data science and David Bell, the Conexus Institute’s executive director to discuss ‘Retirement advice: the great untapped opportunity’.
A regular fixed income, growth of assets to ensure they last along with access to capital to meet unexpected and large expenses account for the three essential needs of a retiree, with each need in “acute conflict” with the other, making proper management of a retiree’s portfolios so complex, Magellan’s McCrudden highlighted.
“Income comes at a cost to growth for retirees and at a cost to their access to capital… We need to think about growth assets as a key building block for investing in retirement but that causes problems for sequencing risk,” McCrudden explained.
During the process of designing a retirement product over recent years McCrudden highlighted a few learnings for delegates at the forum who might have their own or use another bucketing-style approach to managing retirees’ portfolios.
Foremost among these learnings was that high quality and defensive equities are preferrable to pro-cyclical investments.
McCrudden also highlighted that it’s not easy to design these kinds of portfolios and that biases might easily creep in when it comes to what to keep and what to sell.
Finally, McCrudden noted that rebalancing of portfolios needed to be done in a disciplined and methodical way.
“We found that a combination of optimised reserving and mutualisation you can reduce sequencing risk in retirement portfolios by 30 per cent,” he said of his experience designing Magellan’s retirement product.
Product proliferation on its way
The Government’s proposed Retirement Income Covenant which Treasury published a position paper on in late July will result in more choice for retirees as super fund trustees are forced to assist members to meet their retirement goals, The Conexus Institute’s Bell highlighted.
“The RIC (Retirement Income Covenant) could create a challenge because it could require advisers to be across a number of new products created by super funds, some could build scale and others could get left on the legacy shelf,” Bell noted. He added that most new products created by super funds to satisfy RIC obligations could be used as building blocks and form components or tailored advice strategies.
Amid all of the new product solutions likely to result from the RIC and the increasing demands for services from advisers as the demographic trends progress, there is a lingering question whether product solutions in this area will live up to their expectations, Marissa Broome, a practice owner and chair of the Financial Planning Association posed in a video response during the panel discussion.