Discretionary management can play an important role in retirement planning. Julian Harper explains the benefits
Upon retirement, the subsequent loss of earnings needs to be replaced and for many this will come in the form of a pension scheme. It is of paramount importance that this, together with any other investments, is sufficient to meet both expenditure at retirement and future obligations. It is here that a discretionary manager can play an important role through the management of an investment portfolio tailored to meet an individual's requirements. These range from personal pensions such as self invested personal pension schemes (SIPPs) and small self administered pension schemes (SSASs) to general investment portfolios managed alongside any wider retirement planning already in place.
To construct and manage a suitable portfolio, a discretionary manager must obtain sufficient information on a client's financial objectives, investment time horizon and risk profile. Other factors such as tax position, existing investments and the need for income either now or in the future will also need to be considered. These characteristics vary from person to person and so, through a personal investment management service, a bespoke portfolio can be constructed to meet these individual requirements. This can be regularly reviewed to ensure it continues to meet the client's objectives.
Once the objectives have been agreed, the investment process can begin. Within a discretionary portfolio service an investment manager should have access to a wide range of options such as traditional assets, from fixed interest, equities and cash to alternative assets like hedge funds, private equity, and commercial property.
Individuals have different time horizons and as such a correct balance between these assets is essential to a discretionary manager. Those with longer time horizons will have more capacity for risk and so a greater proportion can be allocated to equities if needed. Equally those individuals with a shorter time horizon may prefer to allocate more to fixed interest and cash where volatility of returns is reduced. The next stage is to identify the appropriate geographical areas and markets and then to choose the specific sectors and investments. In a truly bespoke service, any investment restrictions can be taken into consideration.
An increasingly important aspect of asset allocation in retirement planning is managing the volatility of returns from investments that discretionary managers have an increasing universe of investments available to achieve this. In particular, there has been a significant increase in the use of alternative assets. The main reason for adding these is that they offer different investment characteristics to equity and bond markets. Their performance has historically tended not to follow that of traditional assets and this gives an added element of diversification to a portfolio. However, they have to be chosen carefully as, in some cases, their correlation with traditional assets has increased more recently. By combining these types of investment with equities, bonds and cash a discretionary manager can aim, over the longer term, to increase the overall return of a portfolio without increasing the level of risk.
Managing income requirements can be a key part of retirement planning and will affect how a discretionary manager allocates assets within a portfolio. If income is of primary importance, a portfolio will be tailored towards income-orientated investments. In the early stages of planning, income is less likely to be a factor and so the emphasis will be more on capital growth. Given the flexibility of a discretionary portfolio service, this can be regularly reviewed and the portfolio allocation amended accordingly. Where investments are held in a SIPP, income drawdown can be considered as an alternative to buying an annuity and a discretionary manager can liaise with the client to discuss the level of drawdown required and how it can be met.
Researching and monitoring investments involves considerable time and resources which the average investor is unlikely to have. A discretionary manager will generally be supported by a research team who cover a large universe of UK and international equities as well as collectives, fixed interest investments and alternative assets to help ensure the right investment decisions are made. In addition, by exploiting economies of scale, potentially significant reductions in charges can be made on pooled investments through the purchase of institutional units rather than retail units. These generally have no initial charge and lower annual management fees and so help to reduce the total expense ratio of a portfolio using these types of investments.
Good communication is essential when managing an investment portfolio and comprehensive reporting by a discretionary manager plays an important role in keeping a client informed of the progress of their investments. This can include regular meetings, contract notes in respect of any transactions and regular valuations. It is also common to be able to access valuations online. This regular flow of information provides clients with reassurance that their assets are being invested in line with their specified investment objectives. It also allows them to monitor performance which is often measured against an agreed benchmark.
When it comes to the working relationship for SIPPs, in particular, a discretionary manager will liaise with the financial adviser who provides advice on the pension and the SIPP provider who is responsible for the legal framework of the scheme and the formal reporting on the fund. Often global agreements are set up with SIPP providers which help with the successful administration and smooth running of the scheme.
A discretionary manager can therefore play an integral role in retirement planning. With specific objectives in mind, he or she can actively manage a portfolio, taking advantage of market movements to achieve maximum value.
Joined as head of strategy, multi asset, in June
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