Let investment managers manage and financial planners plan

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The FCA review of retirement outcomes is seeing many providers bring ‘investment pathways’ to market as a means of helping customers take a more inflation proof approach to retirement funding than sitting on cash. Many advisers are adopting these solutions or even building their own centralised retirement portfolios. Both approaches, however, fail to really answer the exam question of balancing an income, retirement funding and longevity for the customer, a complex equation at the best of times, and one that needs significant focus if it is to be resolved.

My preferred route has been to use a discretionary fund manager for this purpose, leveraging several benefits for advisers and customers and providing a long-term stable platform for their retirement funding. Decumulation portfolios have always been trickier to build than their accumulation counterparts, and a DFM can offer real value via the knowledge, speed and efficiency they bring to portfolio management. An experienced DFM will have an established framework to build repeatable solutions with rich investment and deep research functions sat behind them. This enables the quality portfolio build required to meet the customer challenge.

Yet despite this, we continue to see the build-up of centralised retirement portfolios where advisers build fund portfolios to try to mirror or outperform the specialists and charge similar fees for the privilege. For those businesses with the scale to deliver this and the discretionary powers needed to make it work, it can make sense, but the number of firms in this category is small. For many firms, the support mechanisms are distinctly manual, and dependent on a small core of people, where the efficiencies and benefits that the DFM brings just cannot be matched.

My fear is that while many advisers have recognised that they are not fund pickers, some have not and are led into blind alleyways by provider and software solutions. The advent of the investment pathways piece just adds to this tendency, by giving default messages that are merely a sticking plaster, rather than a long-term solution. My message is: let investment managers manage, and financial planners plan.

Having “sacked” advisers from the role of investment manager, I do still see a significant task for them - oversight. While the portfolio is run by the DFM, the prudent adviser will monitor what the DFM loads into the portfolios to ensure there are no rogue elements. With there being the odd occasion where a DFM has undertaken a rogue, high risk, portfolio approach, this activity mitigates the chance of their retirement fund undergoing such abuse. Therefore, the customer has not only the risk and compliance function of the DFM to keep them on the straight and narrow, but also the adviser’s regular spot checks ensuring that they are getting value for money. Many advisers neglect the DFM approach feeling that they have no role to play, but this is not the case, and for the most critical fund in a customer’s planning, oversight cannot and should not be overlooked.

Communication can be a double-edged sword if not approached carefully, but today’s DFM is well versed in reporting, a long way from the manual quarterly reports of yesteryear. For customers, this means an up to date position of their retirement funding is available and that when hard messages need to be delivered, both the adviser and the DFM will be delivering a consistent story, so even the most ardent customer will see the need for a change of strategy. I have seen this be invaluable to advisers in saving them time and effort, and allowing them to focus on the solution, rather than dancing around the problem. The downside is where the adviser and DFM disagree a difficult discussion can ensue “backstage” until both parties come to an agreement, but this is a rare occurrence in today’s market, as prudence tends to be more prevalent than risk.

As with most things though, there are drawbacks, and the biggest is the size of the customer portfolio. Neither advisers nor DFMs are charities, and it is expected that the portfolio will deplete over time. This means at some point the customer portfolio may fall below the minimum viability level, a concern the FCA raised in its recent speech at the PFS conference. This is where an adviser needs to consider, based upon their awareness of the customer, what level of safety margin should be used to determine whether the minimum fund value for a portfolio is suitable for a customer. This will include whether the customer takes ad hoc withdrawals, is using a blended solution of drawdown and annuity purchase and whether a high-risk approach is being taken with the portfolio. The DFM in many instances will input into this thinking with their views on sustainability, but it is most important to ensure that if the DFM is to be taken forward, it is as a long-term solution, customers will typically have 25 to 30 years ahead of them, making substantial changes in the early years is likely to raise concerns, and costs of switching route should not be under estimated.

As with all solutions in this space, there are pros and cons, but provided the customer portfolio has the right scale, I am a firm believer that aligning with the right DFM solution will give you the best opportunity for success for your drawdown customers, and set them up well for the future, while avoiding dragging an advice business into expensive and dangerous portfolio builds that can lead to poor customer outcomes.

Rory Gravatt is a consultant at Altus

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