Mark Hannon, Portfolio Manager at Charles Stanley, highlights the greater need for appropriate investment solutions if advisers are not to fall foul of the FCA’s thematic review of retirement income.
The FCA thematic review of retirement income seeks to highlight the significance of clients moving from accumulation to decumulation. It recognises that retirement decisions for consumers have become more complex, with the potential for greater risk. With the decline of Defined Benefit pension schemes, clients must now consider their exposure to investment and longevity risk rather than simply securing a guaranteed income for life. With a rapidly ageing population, and increasingly more people taking on the risk themselves since Pension Freedoms, the FCA have placed this issue at the forefront of their attention, with the regulatory scrutiny unlikely to diminish in the near future.
Potential harm
The thematic review identified the potential harm unsuitable retirement advice can cause to consumer outcomes, noting three key areas as shown in fig 1: Advisers play a crucial role in guiding clients towards retirement solutions that deliver sustainable income.
But it is also essential for investment firms to provide a diverse range of solutions to meet the varying needs of retirees, and the investment strategy plays a crucial role in managing the risk of clients running out of money. For those clients in retirement, volatility is a significant concern. While volatility can be advantageous in accumulation, allowing investors to acquire assets at lower prices and realise longer-term gains, it becomes problematic in decumulation. In this phase, downturns can severely impact customers’ ability to meet their investment objectives as the following case study example shows:
Consider a portfolio worth £800,000 that faces losses early on. A 50% market decline reduces the value to £400,000. To simply return to the original value the portfolio would need to return 100%. [Portfolio 1]
Consider the same portfolio of £800,000 and the same 50% loss, but add in a £50,000 annual income requirement. Here, the remaining £350,000 needs to return 130% to return to its original value. [Portfolio 2]
During decumulation, withdrawing an income compounds the impact of early losses and the portfolio is required to work even harder to recover.
The combination of withdrawals and a fall in the portfolio value can quickly deplete a retiree’s main source of income, depending on the severity of the market fall and magnitude of the withdrawal, it is possible that some portfolios may never recover. It is important for investors to be protected during this fragile period.
As clients transition from accumulation to decumulation, the complexity and risks associated with retirement planning increase significantly. The FCA’s thematic review highlights the potential harm for unsuitable advice and underscores the importance of the investment solution to safeguard consumer outcomes.
Appropriate solutions can help manage risk
The priority for anyone in the early stages of retirement must be managing the risk of a market downturn; outsourcing to a discretionary investment manager via Charles Stanley’s Tailored Income Solution can help manage this risk through active portfolio management and constructing portfolios to meet each individual client’s objectives.
Charles Stanley’s Tailored Portfolio managers collaborate with you, the financial adviser, ensuring we fully understand your client’s unique objectives in decumulation to create a decumulation solution that is well-aligned to their individual objectives and circumstances. Ultimately the joint aim is to ensure longevity and investment risk are being addressed in a tailored solution that can be fully articulated and understood by the client.
To discuss any of the themes in this article, or for information on how Charles Stanley can partner with your business, contact Head of Strategic Partnerships, Tom Hawkins on 020 3627 3990, or email ist@charles-stanley.co.uk.
The value of investments, and the income derived from them, can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to future returns. Charles Stanley & Co. Limited is authorised and regulated by the Financial Conduct Authority
About Mark Hannon
Mark Hannon has been a Portfolio Manager in the Tailored Discretionary service since 2020, having joined Charles Stanley in March 2016. Mark has passed the CFA level III exam and holds a degree in Accounting and Finance from the University of Bath.
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