If the last year has taught us anything, it is to expect the unexpected.
And it’s that expectation of – and preparation for – the unexpected that is vital for a successful central retirement proposition (CRP).
I have always believed a firm should have its own bespoke CRP, and this was recently made virtually compulsory by the FCA. I also believe that, if anyone’s ever going to have a financial planner engaged, it should be in retirement.
But there are a number of elements advisors must be aware of when commissioning or preparing such propositions – this is not the time for cutting corners.
First up is ongoing suitability; it is important here for advisors to remember that drawdown isn’t a product, it’s a pathway. It may be something to consider once a client is in retirement and looking at possible decumulation, but the bigger picture needs to be taken into account.
As we all live longer, retirement comprises a number of stages, from the first flush of activity filled with holidays and grandchildren to the later years, which may feature ill health and the need for fully supported accommodation.
As well as being competent, qualified financial planners, advisors are also human beings, with the same fears, concerns and desires for good quality life at all ages.
People have different ways of achieving those desires, so, rather than shoehorning every client into flexible drawdown solutions, advisors must always focus on what is right for the client.
This is why regular reviews are vital because, while it’s important to have a plan at the start, once that plan has been drafted, it will immediately start to erode and become wrong.
Therefore, an advisor should come into their own in retirement as their job becomes a lot more critical, focused on ensuring that the overall plan remains suitable, rather than simply concentrating on individual products.
However, an effective CRP is not simply about how money is invested; it must also take into account each client’s behavioral biases, health issues and legacy plans.
It involves difficult discussions, handled sensitively – after all, none of us want to leave this mortal coil but we are all going to, and an advisor has to be that critical friend making sure the pathway is suitable.
Because assessing a client’s attitude to risk and capacity for loss is not just terminology to tick off; it should be part of an overall ongoing discussion document that paints a unique, bespoke picture of each individual’s life.
Sustainable withdrawal rates
No discussion about retirement would be complete without mentioning sustainable withdrawal rates.
Last year brought home to people that investing was challenging; many investments fell by up to 40 per cent, and people panicked, realising that the process is no longer a straight line of ever-increasing returns.
A sustainable withdrawal strategy needs a lot of thinking about; it needs to be robust enough to stand up to the unexpected, while taking into account that we can’t plan for everything.
In my 20 years in business alone we have seen 9/11, the IT meltdown of 2000, the great recession of 2008, and a pandemic. No one saw any of these coming, which highlights the importance of having investment portfolios built in such a way that clients have a plan to get through 40 years of retirement.
Any advisor who writes up a plan and sends clients on their way is not doing job properly. They need to be tapping the tiller ever six months or so to make sure that the clients’ withdrawals are still suitable sustainable.
Drawing up a CRP
The idea for an effective CRP is that it can be used as a template for each client and, while they may all end up in a different place, they’ve all been through the same process.
It should be a document that can apply to a retired doctor or a retired dustman; both will go through same discussions and end up will be in the right place for them.
At Paraplanning Hub, we work with firms to build the CRPs, which should reflect a firm’s ethos, their desire to help, what’s right for their clients and their investments beliefs, creating a document they can use as a guide each time.
A successful Central Retirement Proposition is a living, breathing document, constantly updated to reflect a client’s changing desires and circumstances.
Our aim is to support advisors to create such documents, while maintaining that regulatory consistency to keep everything in check and make sure the client is happy – which should be everyone’s goal.