Much has been made in recent years of the trend towards investment outsourcing.
In conversations with platforms, flows to discretionary investment manager (DIM) models are said to be showing double-digit growth.
But NextWealth research suggests the picture is very different in decumulation. Some 58 per cent of advisers say they would never outsource to a DIM for retirement portfolios, preferring instead to manage client assets through multi-asset and multi-manager funds, as well as in-house portfolios.
But never say never. This may be contrarian but we think while growth in investment outsourcing has slowed, outsourcing to DIMs for retirement portfolios is set to increase.
In NextWealth’s recent report looking at the shape of retail investment flows, we found that 14 per cent of assets on average were held in DIM model portfolios. Half of advisers are outsourcing to DIMs, but we found this is typically for a proportion of client assets rather than wholesale.
When we asked advisers about their intention to outsource, most didn't expect to increase outsourcing activity.
So why do we believe otherwise, and that actually outsourcing will increase for retirement portfolios?
For a start, we believe this change will be driven by a combination of more effective ways to manage DIM models for decumulation on platform, plus a greater range and choice of portfolios for decumulation in general.
Innovation in investment strategies goes hand in hand with solving some of the operational barriers to managing client assets in decumulation.
Link these developments together with the increasingly sophisticated tools available to develop better retirement plans, with everything integrating properly, and we may be within touching distance of retirement planning 'nirvana'.
But what are these operational barriers, and how can we go about solving them? We have identified three current headaches.
Splitting one portfolio across different tax wrappers
Advisers may want to recommend clients leave a proportion of assets, including the 25 per cent tax-free lump sum, in the Sipp and draw income through an Isa wrapper. Yet on most platforms it is not possible to split a model portfolio up across different tax wrappers. More work needs to be done to help advisers to manage client income tax efficiently.
Sweeping natural income into rebalances
Another area that can cause problems is natural income being swept up into a rebalance: this is clearly best avoided. If natural income is paid into the cash account then platforms get round this. But not everyone wants to hold natural income this way.
The good news is many platforms are tackling this issue by reserving the natural income so that it is unaffected by portfolio rebalancing. Problem solved.
Preventing cash withdrawals from holding up rebalances
There are challenges on platform around managing income/cash withdrawals and rebalancing portfolios if these activities clash. While the majority of platforms can cater to scheduled withdrawals, ad hoc cash withdrawals do cause problems.
With the best will in the world, it is not always possible for advisers to have a handle on when clients are going to make an unscheduled withdrawal. This causes headaches by holding up rebalances and requires (whisper it) manual intervention.
On some platforms the adviser has to take total responsibility for preventing clashes by moving the cash withdrawal to a separate portfolio each time. This creates extra work.
The most sophisticated platforms are able to queue the rebalance so the cash withdrawal is prioritised and once it has gone through, the rebalance automatically takes place.
To facilitate this, the client comes out of the model whilst the rebalance is going ahead and is then automatically placed back into the portfolio once the rebalance has taken place.
Hope of sunlit uplands?
Advising clients who are decumulating assets without guarantees, as one DIM firm recently put it to me, brings us into "the massively complicated uncertainty space".
Advisers have to employ all the weapons in their armoury to build a robust financial plan or centralised retirement proposition.
This requires a renewed attitude to risk questionnaire, fact-find and cashflow modelling exercise.
The investment approach is built on these foundations but, for most advisers, it is also built on a platform.
Yes, we can challenge DIMs to innovate and to launch decumulation portfolios. But without improving cash and wrapper management, these investment solutions won’t work to the best of their ability. Platforms serious about being used for decumulation are solving these problems.
And so, just maybe, the sunlit uplands of prosperous retirement begin to beckon.
That is, of course, unless we get a Labour government which wants to abolish pension freedoms, in which case it's back to the drawing board.
The alternative scenario is the UK being pulled inexorably under by the collective weight of Brexit fallout. So sunlit uplands, a scrapping of pension freedoms or Brexit consequences. We'll see which one comes first.