Are smoothed funds the answer to major FCA concerns?

While the dust may have settled on the FCA’s Retirement Income Review, the regulator has stressed that retirement income advice would remain a key focus for its activities moving forward.

To underline this point, a subsequent ‘Dear CEO’ letter has asked firms not only to address the findings of the review – but also to document how they have done so.

A particular area of focus is income withdrawals. We consider below how smoothed funds can help meet concerns here.

Is it time to put your withdrawal strategies under the microscope?

According to research, advisers ranked the regulator’s findings on withdrawal strategies as being their most important insight.¹ Here the FCA found that, in some cases, the approach to determining income withdrawals didn’t take account of a client’s individual circumstances.

It also found that a client’s recorded risk profile was often either inconsistent with their stated objectives or lacked consideration for their capacity for loss.

The regulator is very keen for advisers to fully recognise the different challenges clients will naturally face when they move into retirement. Many firms involved in the review were found to be treating those in decumulation no differently to those who were still in accumulation.

This could put clients at a significant, and unnecessary, levels of risk. And while this may not prove to be a widespread industry problem, there’s always room for improvement.

How do you manage a client’s transition from saving for the future to taking an income – and have you considered how a smoothed fund could offer your clients some daily shelter from the threats that may jeopardise a good outcome?

Give your clients the chance of a smoother investing experience

When your clients start taking an income from their pension savings, you’ll need to manage a number of fresh challenges. Yes, you’ll still have familiar inflation and investment risks to think about, but longevity and sequencing risks are now thrown into the mix too. This makes having a clear plan to de-risk your client’s portfolio essential in the years approaching retirement.

Sequencing risk can be most impactful at retirement itself if your client’s portfolio sharply drops in value just before or after they retire. If your client is also withdrawing an income, it will be difficult to recoup those losses. Not only that, but if market volatility continues, the value of their portfolio can quickly spiral downward and never recover.

Pulling a smoothed fund into your recommended decumulation investment strategy can help you add an extra layer of insurance against this threat. These specialist funds aim to deliver a steady, almost predictable rate of growth over the medium to long-term. Usually, they do this by investing in a diverse range of assets, so there is less chance of a collective drop in value. They also use a ‘smoothing process’ which can help to cushion your clients from some of the impact of day-to-day market movements.

With market volatility set to continue, on the back of Geopolitical uncertainty surrounding the US elections and the conflict in the Ukraine, a smoothed fund is definitely an option worth thinking about. This could be used either as a holistic solution for more risk-averse clients, or even as a part of a wider blended portfolio. Either way, it could help you offer clients a degree of short-term shelter, without losing out on performance over the longer term.

You may even want to consider the potential benefits of investing a portion of your client’s pension savings in a smoothed fund and using this to sustain their regular retirement income. Especially as there’s analysis which shows that smoothed funds can help you better preserve the value of your client’s pension savings when an income is being taken out – even in a downward market.

Help your clients stay the course

A common mantra in investing circles is that time in the market beats timing the market. While this is widely accepted to be true, patience may be in short supply for those clients who feel time is no longer on their side.

Including a smoothed fund as a part of your chosen investment strategy could help you avoid delicate conversations, especially with more risk-sensitive clients in times of market volatility.

For example, you may have assessed a client as having a medium tolerance to risk, but the reality of a market fall can bring human behaviour to the fore, and their instinct may be to sell everything. This reactivity, driven by a misaligned capacity for loss, can be as damaging as the market fall itself.

And while a smoothed fund can’t offer your clients full shelter from adverse market conditions, it can help act as a short-term shock absorber.

Changing needs demand industry change

If anything, the findings of the regulator’s review represent a good opportunity for you to kick the tyres of the methodology and processes that sit behind your retirement income advice. This will give you confidence that, if the regulator did come knocking, everything is clearly aligned and designed to meet the needs of each client.

However, the bigger issue at play is that advisers are juggling a lot of challenges right now. And, given the increase in regulatory scrutiny, many may be feeling enormous pressure to catch all the risks that are thrown their way – while also meeting the evolving demands and expectations of their clients.

This shouldn’t be a burden that advisers carry alone. Indeed, it’s on the industry to innovate not only to help them rise to these challenges – but also to make it easier to build both modern and flexible retirement income solutions that are able to help ensure good outcomes for all.

You can also discover the new Standard Life Smoothed Return Pension Fund, which is now exclusively available through the Fidelity Adviser Solutions platform.

Source:

¹ Based on a survey of 200 financial advisers conducted by Opinium from 10-18 April 2024.