As more and more of us choose income drawdown as the cornerstone of our retirement strategy, the need for ongoing financial planning and an accompanying bespoke investment strategy has never been more important given the real risks that savers face in exhausting their funds too rapidly.
Those contemplating drawdown should only do so with an understanding of their future cashflow requirements and a realistic appraisal of whether their assets will be sufficient to meet these needs and an investment strategy that falls into place to support this. This is where the combination of an expert financial planner supported by professional investment manager, can prove so effective in ensuring the client achieves a financially secure retirement. It is clear that many financial advisers are adopting this model, with research firm Defaqto reporting a 27 per cent increase in the use of discretionary fund managers in the 12 months to April 2015.
This refocusing of many adviser businesses around financial planning while outsourcing investment management through use of both discretionary managers and off-the-shelf multi-asset funds of course pre-dates the pension reforms. It is one which has progressively gathered momentum over several years fuelled in part by the increased regulatory focus on ongoing suitability and therefore the need to regularly rebalance a portfolio to prevent it drifting into a different risk category. But this trend towards outsourcing investment management is also indicative of the greater professionalism in the industry. The skill sets and technical knowledge of a financial planner and an investment manager are clearly very different but together a two-expert approach is a powerful combination.
This approach is also a boon to an adviser’s time, a factor that should not be underestimated. With advisers stretched because of client demand, something that looks set to be exacerbated further with the imminent onset of MiFID II, outsourcing the time consuming process of investment management frees up valuable man hours with which advisers can focus on the meat and drink of their work.
Two-way communication is pivotal to a successful relationship between a financial adviser and his DFM partner. Of utmost importance from the outset is to develop a clear understanding about the client’s future cash flow requirements, as this will be absolutely key to ensuring the portfolio is managed accordingly with an appropriate level of risk and that a robust asset allocation strategy is put in place to deliver on these needs. In particular, it is important to plan liquidity carefully around future cash flow requirements, with sufficient assets held in cash or near cash instruments to prudently cover near to medium term requirements.
But it is also vitally important to have an ongoing dialogue because no matter how well designed a plan is at the outset circumstances will inevitably change of time. Good financial advisers know their clients incredibly well and will recognise the financial significance of important changes in the client’s personal circumstances that will have knock-on impacts on their financial plan and potentially require an adaptation to their investment strategy. These might include receipt of a financial windfall such as an inheritance or the downsizing of a property, a change in their health circumstances that might require a reassessment of their life expectancy, the death of a dependant or a divorce.
