In my last Retirement Strategy I talked about the big issues facing the retirement market in 2017 and concluded that with some much uncertainty in the world, deciding how best to convert a pension pot into income is probably one of the most complex areas of financial planning. This decision is made even more complicated because there are so many behavioural and technical issues to consider.

This begs the question how; “how do advisers work out what advice they will give their clients”?

I attend an excellent conference on Exchange Traded Funds (ETFs) a few weeks ago, and although I did not fully understand the rocket science behind alpha and beta I was struck by something said by one of the speakers.

He said that the debate about investments does not have to be framed between active and passive investments because it might be better to talk about the different between investment decisions made with discretion and rules based decisions.

Reflecting on this and applying it to advice on retirement income I see a parallel. I wonder how many advisers use their discretion when making an advice recommendation and how many have a ruled based process? I am not talking robo-advice, I am thinking about the simple rules used by advisers when determining the best course of action.

I guess a good example of discretion is where an adviser takes the view that clients with larger funds are better served with drawdown than annuities and they will arrange the plan on their preferred platform using a model portfolio. This may well be the best solution but where is the evidence that other product solutions and investment strategies have been considered?

Read the original article from Money Marketing

I find myself now asking why I have chosen solution A over solution B and the truth is I have a good deal of discretion. One of the many strengths of financial advisers is that they research the market and use their skills to identify the best solutions so discretion can be a very positive thing.

A rules based approach is where an adviser analysis the client’s retirement objectives and uses a number of simple rules when determining the most suitable solution. One of the easiest to understand rules (but necessarily the right one) is that amount of guaranteed income need over and above the state pension and any DB benefits should be secured by a lifetime annuity. Another popular rule is the so-called 4% rule which is used when calculating the level of sustainable income from drawdown.

There has been a lot written recently about the 4% rule and I will look at the various research papers on this in a future article.

I have my own three golden rules:

  • Client’s should only consider taking risk with their retirement income if they have other sources of income or capital to fall back if needed
  • Client’s must understand all the relevant risks: not just superficially but the impact on their income if there is a market crash
  • All the relevant alternative options should be considered

The conclusion is that just as clients should not be given a black and white choice between annuities and drawdown, good advice involves using the adviser’s own discretion which is underpinned by a rules based process.

I hear you all asking; ”what are the rules”? - I will return to this soon