Adrian Shandley discusses the merits of using discretionary management as part of a retirement planning strategy
I have lost count of the amount of times I have been to see a new client, only to find that they have been investing blindly into the same pension for twenty years without questioning the performance of the underlying funds. The big insurance companies have been guilty of under-performance for years, content in the knowledge they have clients locked in with either high transfer penalties or restrictive clauses.
Thankfully, advisers in the future will find this situation less common as a result of the plethora of flexible pension products now available. If investors can take control of their own pension fund, there is no excuse for neglecting performance, especially within SIPP and SSAS arrangements. However, we all know pension funds only start to be high on the priority list as retirement looms, and with the best will in the world, it is still hard to get clients excited about pension reviews.
From the IFA perspective this is a dilemma. In this fast moving financial world, a clinically picked portfolio of funds within a pension can rapidly start to under-perform; no matter how good the funds were when they were initially selected.
IFAs just don't have the time, the facilities or the resources to micro manage pension funds, and yet ironically, this is often what the client perceives them to be doing!
For all of these reasons, discretionary management is becoming a very popular option for pension fund management. Outsourcing to a discretionary manager, not only outsources investment management, it also outsources a good proportion of the liability previously borne by the IFA. This effectively creates a second level of diligence for little if any, extra cost. This extra layer of diligence also creates an extra layer of accountability, which should theoretically lead to better performance over the medium term. If the stockbroker under-performs, the IFA can appoint a new manager on behalf of the client. You work more with the client than for the client.
Historically, discretionary management has only become feasible for portfolios above £150K or perhaps even £200K, but with the advent of managed portfolio services (effectively fund-of-funds operated by stockbrokers); the discretionary option is becoming attractive even for the smaller pension funds.
From a client perspective, the creation of a bespoke portfolio gives far greater risk control, especially when the client and the IFA have some direct input into what should be excluded or included within the portfolio.
Within the risk management of the portfolio, the client and adviser can also engage a far greater degree of lifestyle profiling. Risk can be reduced over whatever period the client requires in the approach to the eventual retirement date. Again, this lifestyle profiling can be done on a bespoke basis unlike some of the more automated systems engaged by the traditional pension companies. Pensions are just like any other investment, there simply is no 'one size fits all approach' and discretionary management is much better at recognising this fact.
Combining all of these factors, one would also hope that the discretionary manager is more in touch with markets on a day-to-day basis, allowing the portfolio to be adjusted to protect from market volatility or indeed to maximise gains. This is a far cry from making an appointment with the client, completing a switch instruction form, sending it to the pensions company and receiving confirmation some two weeks later! In volatile times such as these, discretionary management can be a very distinct advantage indeed from a portfolio adjustment point of view.
If good management of the pension fund is important pre-retirement, it is even more important post-retirement, especially if the client is in drawdown. The stock market gyrations of the last eight months have yet to be felt by most drawdown clients, the triennial reviews will result in enormous cuts in income for most clients and at these reviews, performance will become a very big talking point!
While on the subject of post-retirement reviews, I would also point out the fact that discretionary managers tend to report much more frequently, normally on a six monthly basis, this leads to the eventual 'shock' of a fall in fund value being less severe than it would have been at an annual review, simply because the client has been kept more frequently informed of the performance of the underlying assets.
Post-retirement, there is another distinct advantage to engaging a discretionary manager, and that is the ability of the client to request or dictate the target yield of the fund (obviously within parameters). If the ability of the discretionary manager to buy individual corporate bonds, structured notes, options, i-shares, hedge, alternative assets etc is important pre-retirement, it is even more important post-retirement for those still in income drawdown.
A word of warning
Selecting a discretionary manager is not as easy as you might think, and ideally you should really have at least two discretionary firms on your panel.
You have to pick a discretionary manager who is contactable, accessible and preferably doesn't mind attending client meetings with you. Clients always like to eyeball a person who will be managing their money!
In my opinion, you should never use a discretionary manager that buys their own funds. No matter what they say about the 'better than best rule', a manager that buys their own funds may well come under pressure not to sell holdings when performance takes a down turn. Buying your own funds is easy, selling them when everybody else is selling, is the difficult part!
These are difficult times, made worse by the constant regulatory changes. If you can outsource fund management and performance to a third party that is one less hassle for you to deal with.
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