Approaches to drawdown are many and varied, reflecting a wealth of possible strategies and a range of client needs. On top of this fundamental complexity, advisers can add:
- greater FCA scrutiny over retirement outcomes,
- growing pressure to deliver sustainable income over longer lifespans, and
- difficult investing conditions for income generation and heightened volatility in markets.
All of which have made drawdown an increasingly difficult challenge.
We interviewed five adviser firms to get their insights on how they approach drawdown. We reveal how advisers are confronting this challenge and cutting through complexity by using structured conversations combined with time-tested financial planning techniques and tools to manage client expectations, build investment resilience and animate the discussion around withdrawal levels, capacity for loss and sequencing risk.
Read the interviews
Summary insights from our adviser research
Advisers say their clients are looking for a balance of four things from their drawdown investment strategy – 1) an inflation-beating return consistent with their risk appetite; 2) some element of growth to fund their retirement; 3) the flexibility to draw a natural income; and 4) the ability to preserve capital and avoid the full extent of market setbacks that expose them to sequencing risks.
Based on these needs, it is little surprise that multi-asset funds, which invest in a variable mix of growth and income-generating assets, have become popular drawdown options with advisers. Our adviser interviews give an indication of how their drawdown conversations take structured routes, which can lead to multi asset recommendations for a range of risk-profiled client types.
Three routes to multi asset
Advisers emphasised three key considerations for arriving at a suitable drawdown investing strategy in their client conversations.
- Reassess your client’s risk profile in the context of their cashflow needs in real terms – this lays the foundation for building a mutually-agreed solution that is more likely to meet their expectations, while building client resilience to market wobbles.
- This risk profiling and cashflow analysis will naturally funnel many clients into a volatility-managed, multi-asset solution that offers a mix of growth and income assets based on their risk level. For larger, risk averse clients, advisers tell us they may use a discretionary model portfolio approach, but for the broad swathe of clients in the middle risk ranges, advisers will typically use a combination of multi asset funds.
- Address the issue of sequencing risk upfront: the differential impact of taking withdrawals in a rising or a falling market can be significant, while an ill-timed market correction could leave a fund depleted without the time (or investment mix) to recover those losses.
- Advisers address this risk with clients upfront by presenting worst case scenarios. A volatility managed, multi asset fund can avoid the full impact of market corrections thanks to a risk-defined level of exposure to defensive assets, while retaining a risk-defined exposure to growth to fund longer lives. Active multi asset funds with a tactical asset allocation overlay also have the capacity to respond to falling markets or tough economic conditions. Some advisers like to combine passive and active Multi Asset funds for this reason, to provide an overall solution that is both flexible and cost-aware.
- Don’t over-complicate the strategy: The investment strategy for most clients should be low-cost, flexible enough to respond to market conditions, and capable of providing an attractive return over time without putting too much value at risk. Most (but not all) of our advisers were leery of taking on the investment manager function. By outsourcing the management to those resourced to do 24/7 research on markets and assets, they felt they could leave investing to the experts and avoid the resource-intensive operational challenges and regulatory scrutiny that comes with advisory management. While certain advisers use bespoke DFM portfolios for larger pots, other advisers are wary of the higher fees and lack of transparency that makes performance comparisons challenging.
- Multi-asset funds can offer attractive capital and income returns for various levels of risk, at a lower cost than bespoke portfolios. Critically for some of our advisers, multi-asset funds can also be combined to reduce institutional bias, blend styles and optimise cost. This enables advisers to effect a more fundamental outsourcing of the investment function that delivers a cost-effective and risk-defined solution for many of their clients.
The Insider Guide to Drawdown
CPD Webinar on our Insider Guide Key Themes
 With thanks to: Duncan Chance, Meridien Financial Planning; Wayne Tandy, Tandy Financial Services; Peter Savage, Fairstone Wealth Management; Stewart Bicknell, Prosperity Wealth and Helena Wardle, Smith & Wardle Financial Planning.
The information, materials or opinions contained on this website are for general information purposes only and are not intended to constitute legal or other professional advice and should not be relied on or treated as a substitute for specific advice of any kind.
We make no warranties, representations or undertakings about any of the content of this website; including without limitation any representations as to the quality, accuracy, completeness or fitness of any particular purpose of such content, or in relation to any content of articles provided by third parties and displayed on this website or any website referred to or accessed by hyperlinks through this website.
Although we make reasonable efforts to update the information on this site, we make no representations, warranties or guarantees whether express or implied that the content on our site is accurate complete or up to date.