Is the much-heralded Centralised Retirement Proposition (CRP) really being implemented? In our recent research into advice in decumulation, we were curious to find out.
Advisers seem to be failing to adapt their investment strategies for retirement – with their accumulation strategies geared for growth rather than sustainable withdrawals. Yet the chances are that the needs of clients in decumulation will be different from those in accumulation. This is the worry of several industry commentators that we have spoken to, including the retirement expert Malcolm Small. The FCA has been firm about requiring advisers to ‘consider the needs and objectives of your target clients when designing or adopting a Centralised Investment Proposition (CIP).’
A CIP means that firms can ensure that advisers use a consistent and carefully thought-out approach in their investment process. One might have thought that retirement planning needed the same level of consistency and care. Yet our research shows that the adoption of CRPs lags far behind CIPs.
When we surveyed advisers we found that 70 per cent were working at firms with an agreed Centralised Investment Proposition, but only 40 per cent worked for firms with an agreed CRP. Advisers from larger firms – ie firms with over £250m in assets under advice – are far more likely to operate CRPs. This is also the case for CIPs, with just 53 per cent of small firms using a CIP compared with over 80 per cent of larger firms by AUM.
What’s more, approaches to investing for decumulation vary greatly from firm to firm. And in some cases from client to client. One adviser told us: “There is absolutely no typical approach. Everything is done on an individual basis.”
The vast majority of advisers use combinations of investment products to create decumulation portfolios for clients. Advisers are especially keen on flexibility because they know that clients’ income needs are likely to change over the course of decumulation. One-off withdrawals and changes in the rate of regular withdrawal – and indeed differential rates of withdrawal from different tax wrappers – are frequent requirements on the decumulation journey.
Advisers with relatively small numbers of clients can probably manage bespoke portfolios on an advisory basis. One commented to us: “The majority of my clients are invested in bespoke portfolios for themselves. The funds we are using are consistent but we might tweak the asset allocation. We create the portfolios ourselves on an advisory basis. It is easy to switch funds because of technology.”
However, the larger the number of clients, the harder it is to maintain consistency in relation to risk profiling, asset allocation and fund holdings. Larger firms with many clients are more likely to operate a Centralised Retirement Proposition but far less than CIPs as we have seen.
Two decumulation solutions appear to be gaining traction among advisers:
- Multi-asset funds
- ‘Bucketing’ – ie two or three-part portfolios
Our recent survey for Platforum’s Advice in Decumulation report has shown a rise in the use of multi-asset funds by adviser firms: 77 per cent of advisers had recommended a multi-asset fund to clients in retirement over the previous 12 months. Multi-asset funds were also the second most likely product (after equity funds) for advisers to recommend to clients in retirement. The number and variety of such funds have rocketed, and most of them try to reduce downside risk by using diversification or derivatives (eg targeted return funds).
But for larger portfolios (£250,000 plus) more firms seem to be adopting ‘bucketing’ strategies. ‘Bucketing’ involves having a balanced portfolio together with a cash reserve holding the equivalent of 12 to 36 months’ worth of income.
The more complicated version has three buckets: a cash reserve containing up to 24 months’ income; a portfolio of low-risk, low-return assets to cover the following five years’ regular withdrawals; and a longer-term, higher-risk, higher-return portfolio.
In both models, the cash reserve is topped up on a discretionary basis using profits from the long-term portfolio.
The increasing adoption of bucketing strategies may explain why many firms are shying away from implementing CRPs. Where a bucketing strategy is used, some experts make the case that there is no need to design a different portfolio for decumulation: in periods of negative returns, the strain is taken by the income reserve. Indeed maybe the bucketing approach counts as a CRP?
Miranda Seath is head of intermediary research at Platforum