In this second part of IFA Magazine’s discussion with Vince Smith-Hughes, Director of Specialist Business Support at Prudential, we follow on from last month’s Q&A to discuss how and why PruFund funds are being increasingly recommended for advisers’ clients going into income drawdown, how it can prove to be a valuable tool in the financial planning toolkit as well as lifting the lid on the new PruFund Planet range where ESG is the name of the game.
In today’s volatile market conditions, a growing number of advisers and paraplanners are seeing the benefits of the PruFund range of funds which aim to grow clients’ money while giving them a smoothed investment experience.
IFAM: WHY DO YOU THINK THAT THE USE OF PRUFUND IN DRAWDOWN IS SO POPULAR WITH ADVISERS?
VINCE SMITH-HUGHES: One reason for this growing popularity in drawdown is, I believe, that advisers are naturally very conscious of sequencing of return risk for their clients. In other words, in instances where you might be seeing drawdown fund values fall sharply but you’re still taking an income from the fund, I always think of it as you are effectively crystallising your loss here. Clearly, with that cushioning effect of the smoothing which comes with PruFund, you are helping to alleviate that sequencing of return risk.
Of course, I’m certainly not saying it’s the only tactic that advisers will use if they recommend PruFund. They may have, for example, an element of cash as well. But I think that that sequencing of return risk has really come to the fore over the last few years, certainly since the advent of pension freedom.
The other reason PruFund is such a popular choice relates to the predictability of the fund. As PruFund has expected growth rates (EGRs) advisers can use these to help them to actually model around what a client’s income is going to look like. I think that’s a significant benefit.
IFAM: HOW CAN PRUFUND ASSIST ADVISERS DURING THE FINANCIAL PLANNING PROCESS THEY CARRY OUT WITH THEIR CLIENTS?
VINCE SMITH-HUGHES: I believe that EGRs are important here too. When it comes to advisers carrying out cash flow modelling for their clients, having PruFund’s EGRs is a really attractive thing to be able to incorporate into the process. If you’re looking at a cash flow model, quite often advisers will ask ‘how do I actually know what growth rates I’m going to use going forward’ if you look at a deterministic model?
With PruFund, we’ve almost got the best of both worlds in terms of looking at either a deterministic or a stochastic modelling process. Those EGRs are basically worked out using thousands and thousands of different assumptions in a similar sort of way to a stochastic model. I always think the problem with stochastic modelling is that it’s not very easy for the underlying client to understand it. Equally, the problem with deterministic models is that you’ve only got one scenario going forward. And of course, that scenario won’t play out. It will always be different.
By using EGRs as a starting point in the cash flow model, you’ve got all the advantages of all the work that’s going on in the background to arrive at the EGR and then you can actually use it in a deterministic basis, which makes it much easier for the client to understand. It gives the adviser a benchmark to use that this is the expected growth rate. Obviously, charges can then be taken into account and we can model on that going forward, with a bit more certainty and clarity than perhaps they can with a lot of other funds.
I think that’s a real advantage, particularly in the drawdown space. Although I would add that a lot of advisers are now using it for income in ISAs as well. So again, exactly the same process applies as we’ve discussed here in drawdown scenarios.
Even for a client in the accumulation phase, there is still an appeal for the PruFund range based around the EGRs. PruFund has established a good track record in terms of performance and looking ahead, it’s an appropriate type of fund that advisers will be looking at when that client actually does ultimately come to retirement.
IFAM: LAST YEAR, PRU LAUNCHED THE PRUFUND PLANET RANGE. CAN YOU EXPLAIN WHAT’S DIFFERENT ABOUT THIS AND WHERE ADVISERS ARE SEEING THE APPEAL?
VINCE SMITH-HUGHES: The new PruFund Planet range is now available for the retirement account and available on our offshore bond wrappers. PruFund Planet brings all the benefits that the rest of the PruFund range offers in terms of diversification of assets, smoothing, the same investment management team etc. But the differences are that it’s a solution and opportunity-based, very ‘ESG friendly’ fund range.
It’s been attracting a lot of attention from advisers as a result. It’s a very different type of product which combines the effect of the smoothing process along with it being an opportunity focus-based ESG fund range. There really aren’t that many others like it available on the market today. I believe that it’s the right product for today’s market conditions and that it will continue to gain attention from advisers due the appeal of smoothing added to the growing number of clients looking to integrate sustainability criteria into their investment portfolios.
About Vince Smith-Hughes
Vince is Director of Specialist Business Support at Prudential. He has worked in the financial services profession for over 35 years, and has previous experience as an IFA as well as holding senior pension roles at Clerical Medical and Winterthur Life. Vince is an experienced platform presenter at industry events and a regular contributor to trade and national publications on all matters relating to financial planning. He is a Fellow of the PFS.