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The Insider guide to drawdown
In association with BlackRock

Interview with Duncan Chance, Meridien

Duncan has been in financial services for over 13 years, with the foundations of his training beginning with HSBC Bank. Within the bank, he progressed from being a mortgage adviser to developing his knowledge and becoming a financial adviser. In August 2012, regulation changes forced him to leave the bank, so he became a self-employed Independent Financial Adviser. Following professional development, experience and knowledge, Duncan decided to make the next step in his career to set up his own Independent Financial Adviser firm, Meriden Financial Planning.

Which questions do you use with clients when starting the conversation about retirement?

We always start with the client’s objectives: what they want to achieve, how much they think they’ll need, when they intend to retire, and what they will need the money for.

To determine whether drawdown is right, we tend to compare against an annuity quote, as well as looking at any other assets they might have, factor in their earnings and consider their tax position.

It also depends on the client’s overall profile. Clients in their 50s and 60s will be thinking about whether they have enough to live off, any tax implications and whether they want to consider phased drawdown, for instance.

We will look at whether they are likely to need more money in the earlier or later years. Older clients’ objectives can change, so their priorities may not be whether their money is going to last but rather succession planning, so what they are able to pass on to their spouse, children or grandchildren.

Older clients’ objectives can change, so their priorities may not be whether their money is going to last but rather succession planning, so what they are able to pass on to their spouse, children or grandchildren.”

Are there any typical questions you get asked by clients, or indeed any unusual or tricky ones?

The most common question we get is around likelihood, so how likely are things going to work, or how likely are they not going to work. To help explain, we will use cashflow forecasting tools; we use CashCalc. There are probably more comprehensive cashflow tools out there but we like to try and keep it simple, both for the adviser and the client.

A common question is ‘how likely is it that X is going to happen?’ Using cashflow, we can demonstrate things visually and clearly. We can show them that if the pot grows at X amount, inflation is likely to be Y, and we have assumed a performance of Z… this will be the outcome. We also often get asked ‘what happens if the performance is nowhere near as good as you have anticipated?’

What is a realistic and safe withdrawal figure?

This is something we often debate in our investment committee meetings, which is made up of admin staff, advisers and directors.

It depends what everyone charges and on the risk that clients are taking, but we generally fit in at between 2.5% to 3% as a safe withdrawal percentage.

Based on the last five to eight years’ performance things might look too inflated; if you took 5% over the last eight years, it would still be fine. But I think 3% would be a safer withdrawal, after charges.

It’s important for us to present challenge amongst our investment committee. Depending on what level of risk the client takes, you could back-test it over eight years and think 3% is quite conservative but the reality is you’ve got to look at different eight-year segments because in certain years that might be a little bit too much.

It’s also about timing, which is why we’ve got to try and get the asset allocation right. For example, if a new client takes a 25% tax-free lump sum just after a crash, that is just going to deplete the fund considerably.

How do you tackle the conversation about life expectancy?

Again, that is something we debate. Our cashflow forecasting tool gives us an anticipated living age but that can vary depending on family, personal health and where you live; there are a lot of things that can determine it.

A lot of clients turn around saying, ‘I’m never going to live that long,’ but actually a client probably underestimates their anticipated living age and many clients are going to live into their 90s. So, rightly or wrongly, we run it to 100. In principle, we run all our cashflow forecasting to age 100, regardless and then work back from that, having more of an in-depth conversation with clients about what they think.

That’s our standard approach to our planning, for simplicity, but then a client will ask, ‘how much will I have at 82, based on your projections and on our anticipated withdrawal levels and performance?’ We would then determine that, at which point the client might then think, ’82? I’m not going to be spending anywhere near as much,’ or, ‘I don’t think I’m going to live that long.’

That’s the point at which we would say, ‘Your anticipated living age might be 87 or 88 based on national statistics,’ so we have a personal conversation, helping them to see they might underestimate how long they’re going to live.

Obviously, we’re not medical experts either. We can ask family underlying history but we really don’t know… but you’ve got to start somewhere.

How do you assess attitude to risk and capacity for loss for clients in decumulation?

Attitude to risk is an overall risk tolerance, so their capacity for loss could change but their attitude to investment risk may not. We have to help clients with determining their capacity for loss, which is linked to cashflow forecasting, or whether that money is likely to last.

A 40-year-old who is going to retire when they’re 65 might have a very low risk attitude to investment risk but their capacity to loss is very high because it is linked to timescales really, especially with a pension, as they can’t take the money out.

Just because a client’s risk profile might be a six doesn’t mean my advice would be a six on a scale of one to 10, because capacity for loss could drive the outcome down. An agreed risk profile could be very different to a client’s attitude to investment risk.

I think it depends on how you word it and how you define it. I think clients’ attitude to investment risk is generally consistent, as a client gets more educated or experienced it might change but advice and objectives should be very different depending on whether they are in accumulation or decumulation, rather than being determined by a questionnaire that they complete.

Attitude to risk is an overall risk tolerance, so their capacity for loss could change but their attitude to investment risk may not. We have to help clients with determining their capacity for loss, which is linked to cashflow forecasting, or whether that money is likely to last.”

How do you describe and discuss the issue of income sustainability with clients considering drawdown?

If a client is within five years of retiring then it is mandatory as part of the annual review to do a cashflow forecast to try and predetermine their income level, which is where we might change a client’s asset allocation as they are approaching drawdown.

We have this as part of our company policy; our advisers must do a cashflow forecast for anyone in drawdown and if they are exceeding 2% of their overall funds under management a cashflow forecast must be done to establish income sustainability.

This prompts the conversation; we also use stress-testing and simulations of past events to see how, if they happened again, they could affect the timing of their income plan.

For instance, if a client is going to retire in five years, you could simulate the crash in five years’ time, or four-and-a-half years’ time, to see how that impacts the plan.

If a client says, ‘at 60 I want to take my 25% tax-free cash out because I want to have a great holiday,’ then we might change the amount they plan to take out and change the investment strategy on that amount.
They then might not need income for another five, six or seven years if they’re going to stay working, so that is how we would probably personalise it, and explain that a different investment strategy can be applied for those types of things.

Which investment strategy or strategies do you typically recommend for clients in drawdown?

We don’t build our own model portfolios, or pick single asset funds; I think there are professionals in the industry who can do that better than us. We might have a basket of multi-asset funds to meet different client objectives but we leave the underlying asset allocation of those multi-asset funds to the professionals, whoever our agreed partners are in that.

I think if you’re a really big firm you could have your own discretionary fund management committee to do that, but we’re not a huge business; we’ve got five IFAs and £140m under advice.

We look at bucket approaches, taking into account longevity, protection and risk levels and that will depend on when they are planning to take their money out. We use a combination of Dynamic Planner for our core fund research and selected agreed partners that sit across each of the various risk bands.

The advisers are able to select within their 1-10 profile. If they’ve agreed a five, they can do a basket of the underlying approved multi-asset funds. We might run some MPSs as well, depending on active management and passive management, so we do a combination of those.

We then have a few additional partners on there and we do our individual due diligence on those, justifying our reasons for including them. If any adviser wants to go outside of the Premium or Select funds from Dynamic Planner or our basket of approved funds that we have as core holdings, they have to have internal pre-sales signoff.

To what extent do you talk about ESG with drawdown clients?

ESG is definitely part of the conversation. I spoke to one client who was 62, wanting to retire at 66 and when I said I wanted to ask a bit more about ethical and sustainable growth, and better governance, he said, ‘Duncan, I’m 63, I don’t really care about that anymore.’ But that was one client. I think more and more clients are increasingly receptive to those conversations.

It’s not just younger clients either. Even drawdown clients are showing a bit more interest. I suppose our challenge, and a debate we’re having in our investment committee, is defining ‘what is ethical?’

Are you better to invest in a pure ethical, renewable, really specialist fund or in companies that are making bigger improvements to their carbon footprint?

For instance, if BP reduces its carbon footprint by 10%, will that have a bigger impact on the planet than the ones that are already renewable? Then you get into the ethical preferences of the client. It’s quite hard.

We’re independent but we might need to go restricted on our ethical proposition and say, ‘These are our specific ethical strategies within our risk profiles, but if there is a specific niche you want, you might have to go elsewhere.’ It is a really hard strategy for us as a firm, and advisers generally, to get it right.

Are you better to invest in a pure ethical, renewable, really specialist fund or in companies that are making bigger improvements to their carbon footprint?

For instance, if BP reduces its carbon footprint by 10%, will that have a bigger impact on the planet than the ones that are already renewable? Then you get into the ethical preferences of the client. It’s quite hard. ”

How often do you review clients in decumulation?

We have a standard ongoing service proposition, how we review them might be different, so there are some mandatories we have to do for drawdown clients, but it doesn’t go into how often we review them.

We offer clients ad hoc reviews if they feel necessary but we still offer an annual review service or those around a circumstance change – a death, a big expenditure or job loss before retirement, for example – but what we actually do for them is a bit more than that, so it will include a cashflow forecast, for instance.

How do you stress-test the plan?

In our cashflow modelling we do put a stress test in, so we do a market simulation, going back to the 2008 crash – the biggest one I can remember and most clients can associate with – and build that into our cashflow.

We can then say, ‘Assuming your pot falls by 25% or 30% (depending on what their risk profile is), how does that impact on the longevity of that money?’ If that really does impact it, we might change asset allocation for a certain amount of money, so we try and answer it that way and use graphs to show that, even if it falls by 25% or 30% then the money will still last, based on the client’s objectives.

My principle has always been about managing clients’ expectations, so tee up a meeting and say, ‘my role is to try and make this money last, let’s look at a scenario or scenarios when it wouldn’t. Can you all remember when that happened?’

I think clients can relate to that, so they don’t seem to object, rather they probably appreciate it.

I don’t like the lineal approach from some cashflow forecasting tools, I like to show volatility because that is reality. If you say ‘You’re going to earn 3% a year,’ and then throw a market crash in, it won’t work.

Further reading

Interview with Wayne Tandy

Interview with Peter Savage

Interview with Stewart Bicknall

Interview with Helena Wardle