Sententia articles October 2020

In this issue

Path to Remote Engagement: Could this be the time for pulling out of the holding pattern?

COVID-19 has turned our lives upside down, changing everything from the way we socialise and work through to how we shop, with a common thread being the increased use of technology. The fear here is that communicating without seeing people in person creates a distance that stops us from properly ‘connecting’. In reality, however, there are many ways in which, as well as taking on a lot of the heavy lifting at work, technology has actually brought people together, creating new ways to interact and showing us another side to our work colleagues...

Funding retirement income: The liquidity illusion

Creating and managing a regular flow of ‘income’ from a diversified portfolio has been described by Bill Sharpe (he of ‘Sharpe Ratio’ fame) as the “nastiest, hardest problem in finance” and he has a point. Balancing the three key moving parts in the retirement equation - longevity, inflation and investment returns - and achieving the optimal journey for the retiree, is something that has occupied some extremely bright minds for a few decades now.

 

Path to Remote Engagement: Could this be the time for pulling out of the holding pattern?

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COVID-19 has turned our lives upside down, changing everything from the way we socialise and work through to how we shop, with a common thread being the increased use of technology. The fear here is that communicating without seeing people in person creates a distance that stops us from properly ‘connecting’.

In reality, however, there are many ways in which - as well as taking on a lot of the heavy lifting at work - technology has actually brought people together, creating new ways to interact and showing us another side to our work colleagues. Think of those times when pets and children have had surprise cameo appearances in conference calls, and the glimpses we’ve had into our colleagues’ choice of wall art; think of how the question ‘how are you?’ at the start of a meeting has now become a genuine one rather than just a traditional greeting and how the small talk at the start of meetings has taken on a new importance. 

In times of stress or change, having a real connection with the people you do business with - both clients and colleagues - is more important than ever. Indeed, for those continuing to minimise their physical interaction with the outside world due to health concerns, remote contact is invaluable for their mental as well as physical health and - more specifically to our industry - for making sure they don’t miss out on essential advice and information they need.

The providers of technologies such as Teams and Zoom have fast tracked their developments and made their offerings more flexible and easier to use and the current situation has also accelerated the learning curve for many clients who might traditionally have been resistant to engaging online. The number of grandparents whose interaction with grandchildren is now primarily online using Facetime, Teams, Whatsapp etc. shows that even those who were completely unfamiliar with technology for social interaction just a few months ago are now becoming dab hands at it.

With that in mind, now is very likely the time for Advisers to have better luck engaging with those new clients who may have traditionally baulked at the concept of receiving advice any way but in person.  With many more potential clients now used to interacting virtually and websites such as Unbiased providing reassurance that remote advice is ok, hopefully firms that have been stuck in a holding pattern can now start to pull out of it and ready themselves to land in a New Normal where it’s easy to reach out to more new clients. 

A recent article from unbiased.co.uk highlighted that:

Even in a pandemic, you can’t just put your life on hold. People aged 70 and over have been advised to limit contact with others as much as possible, as a precaution against catching the potentially fatal COVID-19 disease. But if you’re in or near this age range, you will have another big concern on your mind: your retirement income. There is, ironically, a big overlap between those who are most at risk from coronavirus, and those most in need of receiving one-to-one financial advice. 

For our part, we’re working to make it is as easy as possible for you to implement the remote advice you’ve given, removing the need for wet signatures for most process so that face to face meetings aren’t required. 

We’ve always delivered the vast majority of services online, but we’ve fast tracked our ongoing development programme to move the remaining servicing functions onto Adviser Zone. Whilst this work continues, we’ve moved the most frequently used processes to signatureless forms wherever third-party processes have allowed it. We aim to streamline processes for both you and your clients, but we will never compromise on the security of your clients’ money, which is why we made the decision to introduce biometric verification to our processes. Again, technology is stepping in to ease the process. Even the most tech-savvy of today’s silver surfers probably never imagined that taking a selfie and filling in a few lines of data would replace old school identity verification processes in their lifetimes. 

Could this be a good time to revisit those potential clients who, in the early days of lockdown, lacked the confidence to engage in remote advice and get them to pull out of their holding pattern?

 

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Thought-leadership from Just: Funding retirement income - The liquidity illusion

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Creating and managing a regular flow of ‘income’ from a diversified portfolio has been described by Bill Sharpe (he of ‘Sharpe Ratio’ fame) as the “nastiest, hardest problem in finance” and he has a point. Balancing the three key moving parts in the retirement equation - longevity, inflation and investment returns - and achieving the optimal journey for the retiree, is something that has occupied some extremely bright minds for a few decades now.

The preferred approach to this conundrum from within the UK financial planning community is currently to rely almost exclusively on fairly traditional diversified portfolios of stocks, bonds, and maybe some alternatives, along with some property exposure and an element of cash. The hope is this approach will deliver sufficient returns to deal with the spectre of inflation, and when it comes to the third horseman of the apocalypse, longevity, this risk is typically being self-insured. This preference to self-insure longevity is often put down to a desire by both the client and the adviser to maintain liquidity for legacy provision, or in case there are unexpected future events. But is this liquidity real or an illusion?

Turning to another leading thinker, Wade Pfau (Ph.D), a pre-eminent retirement planning researcher from the US. Pfau, who has published copious papers on the subject, suggests that true liquidity within a retirement portfolio only exists to the extent that there are free assets not allocated to support withdrawals scheduled over the expected length of retirement. In other words, if all the portfolio is needed to support the retiree's lifestyle, the fact that the client has £1m invested does not mean they have £1m of liquidity, it’s an illusion! According to Pfau:       

 

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This lack of true liquidity is heightened when longevity is being self-insured. To effectively manage the risk of the client outliving their assets, a planner should structure withdrawals for a period of time well in excess of average life expectancy (or 50% survival probability). This could lead to a retirement planning period of 35 years or more for someone living off their assets from age 65.

To provide a practical example, let’s imagine a relatively balanced risk male retiree who is age 65 and requires an income of £30,000 throughout his retirement. This may not represent all of his income requirements but for our purposes let’s just focus on the £30,000. Using planning software you can calculate that to provide this level of income to the point where the client has a survival probability of just 10% (that’s a 90% likelihood that they will be dead) would require the client to allocate £1.220m* of their assets to support this spending until age 99. This equates to a withdrawal rate of 2.46% of the initial £1.220m capital base. So if the client had a £1.5m portfolio he would have only £280,000 of liquidity. Can we improve on this and create greater liquidity?

Incorporating risk pooling into the client’s portfolio, improves liquidity, as the cost of guaranteed income for life solutions is based on the average longevity of a large cohort of individuals rather than a planning assumption made for an individual client. At current rates, the cost of securing the same £30,000 of income for life using risk pooling would use £653,153** of the clients portfolio, increasing liquidity to £846,847.

Novia platform users have exclusive access to the innovative guaranteed income for life solution, Secure Lifetime Income (“SLI”). SLI sits within the SIPP, on platform and you can read more about it here.

There are other benefits to incorporating risk pooling into a retirees plan when a contemporary solution such as Secure Lifetime Income is viewed as part of an overall retirement portfolio, such as long term improvements to portfolio sustainability and increased legacy provision and we will explore these in other articles but let’s finish this one with a few words from Wade Pfau…”any form of risk pooling can help manage longevity risk more effectively than reliance on an investments only strategy”***

If you'd like to find out more about the Guaranteed Income option on the Novia Platform, please speak to your Novia Regional Sales Manager.

 

 * assumptions

-          Balanced 60% Equity/40% Bond portfolio

-          1.50% recurring fees (platform/investment/ongoing advice)

-          Gross/no allowance for tax] 

**Guaranteed Income for Life quote assumptions (SLI):

-          Single life

-          Level, no escalation

-          Fit and healthy

*** Quote from Page 312 of his book:

“Safety-First Retirement Planning – An Integrated Approach for a Worry-Free Retirement”

Wade Pfau, Ph.D. / CFA / RICP

 

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