Joe Simpson, director of investment management at Walker Crips Investment Management, examines the challenge facing clients approaching retirement, when the timing of returns can be just as important as long-term growth.
Clients approaching and in the early stages of retirement must navigate a challenge unique to them: how can they continue to grow their portfolio in a way that minimises the risk of aggressive market falls right at the end of their working life? Those nearing or at retirement have earnt almost all the money they will in their lifetime; time is running out to recover short term losses.
This is a cohort advisers are very familiar with. According to the Financial Conduct Authority, 69% of clients’ primary objective for seeking advice relates to pensions and retirement.
The MPS is the core starting point
A model portfolio captures long-term market returns through exposure to underlying assets and manages volatility through diversification and asset allocation. For clients in accumulation, particularly those with long time horizons, it’s exactly what they need.
The challenge is that the years around retirement are different. Once a client is approaching a target retirement date, or drawing income from their portfolio, the timing of returns becomes significantly more important. This is where the limitations of the MPS become more apparent.
A client who experiences poor returns early in drawdown may be forced to take income from a falling portfolio, crystallising losses before the market recovers. A client who achieves stronger early returns can build a more resilient base.
A prime example of the importance of timing happened in early 2020, at the start of the Covid-19 pandemic.
The FTSE 100 fell around 35% between January and March, recovering only slowly over the months that followed. For clients already taking income, that meant selling portfolio units at depressed prices month after month, just to generate the same income they always had. When markets eventually recovered, those units were gone; the portfolio bounced back, but from a smaller base than it would have had the client not been forced to sell into the fall.
For someone who had been drawing down steadily since 2019, the damage was already locked in long before the recovery arrived.
A model portfolio is built to capture long-term market returns. So, for clients who need some certainty in the near term alongside long-term growth, it may not be sufficient on its own.
Enter structured products
A structured product allocation could sit alongside the MPS and broaden the range of market conditions in which the wider portfolio can produce positive returns.
Defensive autocalls and step-down plans can produce a positive return when the underlying index is flat or modestly lower at an observation date. For clients in the early years of retirement, structured deposits can also play a role: supporting planned income needs with 100% capital protection at maturity from the deposit taker, and FSCS protection up to applicable limits, subject to eligibility.
During a period like the first half of 2020, an adviser with structured products in a client’s portfolio had more options. They could’ve, for instance, taken income from a product producing a defined return, rather than selling MPS units into a falling market. The MPS could’ve been left to recover. Of course, structured products are not suitable for all clients, but for those wanting a little more certainty, they lower risk by giving a portfolio more than one way to produce a return.
Structured products are not designed to replace the MPS. Instead, the aim is to improve the shape of client outcomes by reducing dependency on markets rising at exactly the right moment and giving advisers more to work with when a client is approaching or already in drawdown.
Consumer Duty asks advisers to demonstrate they have actively pursued good outcomes for their clients, and the FCA has made clear that retirement income advice warrants particular scrutiny. For clients in the decumulation phase, it’s vital advisers have considered whether their current portfolio construction is well-positioned for the risks they face. Where structured products are suitable, their potential to broaden the conditions under which a portfolio can produce positive returns is directly relevant. Ruling them out without serious examination feels short-sighted. A portfolio that recognises that structured products have a valuable part to play may be better placed for the vital retirement-adjacent years.
