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Henry Cobbe, from Elston, unpacks the key points for advisers from the FCA’s thematic review on retirement income.

Henry Cobbe, founder and Head of Research, at Elston Consulting, talks to Bella about the FCA’s findings following its thematic review of retirement income advice, why it matters to advisers, and most importantly, what they need to do about it.

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Transcript

Bella Caridade-Ferreira

Hello everyone and welcome to Compare the Platform’s Cut Through the Noise podcast which brings you content that matters to advisers. This week we’re talking to Henry Cobbe, who is the founder and Head of Research at Elston Consulting, about the FCA’s long-awaited FCA Thematic review of retirement income advice. Welcome Henry.

Henry Cobbe

Hi Bella.

Bella Caridade-Ferreira

Hi. Hi. And before we launch into this interesting discussion, tell me a little bit about what Elston Consulting does and how it supports advisers.

Henry Cobbe

Great. First of all, thanks very much for having me on. Great to be here.

Bella Caridade-Ferreira

It’s always a pleasure.

Henry Cobbe

Thank you. So, I set up Elston back in 2012 because of two big regulatory changes. The first was RDR, which all advisers will know about and the other was automatic enrollment and the thinking behind setting up Elston was, how can we learn from other markets to build solutions for these big regulatory changes? So the focus very much was on workplace pensions and default strategy design and how to build pension strategies for workplace pension schemes, but also how to build solutions that put advisers in charge in the same way we saw in America back in 2006. So it was like what lessons can we learn from overseas to build solutions for this new regulatory environment. So that was how we set up the business back in 2012.

Bella Caridade-Ferreira

Excellent, and you talked about pensions and that dovetails nicely into today’s topic of discussion, which is the FCA’s review. It spent a long time, the FCA spent a long time reviewing the retirement income advice, and it completed that review, I think back in late March, well, it wrote to the CEOs asking them to review their processes off the back of that review. So talk me through what it found and talk me through its key areas of concern.

Henry Cobbe

OK. Well, we might go a bit further back than that if it’s OK, and actually, if we all take a trip down memory lane to the famous Lamborghini speech. But pensions freedom actually was in 2014. That was when the pensions freedom thing came through with HM Treasury. And to be honest, it came as a bit of a surprise, I think, even to the FCA. So there was that speech which you’ll remember; ‘everyone can buy a Lamborghini’.

Bella Caridade-Ferreira

That was George Osborne trying to get everyone on side, yeah.

Henry Cobbe

Exactly. And I think then the regulator then thought ‘oh, how do we safeguard it so that consumers are protected from poor outcomes’ and so their immediate priority was to focus on the non-advised customers because they thought well, advised customers have got advisers who should be protecting them, so let’s focus on the non-advised market first. So they started something called the Retirement Outcomes Review back in 2015, and then they published the findings of that in 2019 and then in 2021 they published their final guidance about the non-advised market and that was for the non-advised market for the stock brokers and the insurers who go direct to client.

That was a huge bit of work about how do they make sure that clients who don’t have the ability to get advice, can make choices around so-called investment pathways, or we call them retirement pathways and in a way that’s quite similar to the workplace pension schemes of, you know, do clients target cash, do they target drawdown, or do they target annuity? And that was the kind of pathways framework.

So once that was all done and all the pathways were provided, we did some project work for interactive investor about helping them build out their retirement pathways framework. Then the regulator turned to the adviser market and in a way, it’s almost the same question of how do we help advisers get these different decumulation solutions? How do we think about target cash, target drawdown, target annuity and how do we make sure that the advice process, which everyone is very well established in in accumulation, is totally different and needs to be different for decumulation.

So they started doing their retirement study effectively back in early 2023 and then they hoped to be published by the end of 2023, but then they pushed it back to the end of March 24. And it’s very much focused on the retirement income advice process, as well as the solutions.

Bella Caridade-Ferreira

On the process and on the solutions; So it’s published, it’s written to the CEOs and what were its key concerns, what did it find in the find? What shocked it, really?

Henry Cobbe

So I think what’s interesting is, there’s probably the things that we expected to see in there, because obviously we’ve been quite vocal and participating in these various consultations with the regulator. So, what we expected, and what we got was a focus on; how do you assess suitability in retirement? I.e. how do you risk profile in retirement? It’s not the same as accumulation where you have these kind of attitude to risk questionnaires about, how do you feel about risk and what kind of losses you prepare to stand? It’s not an attitude or behavioural thing, it’s an economic thing. Like, will this amount of money last your lifetime? Yes, or no? It’s an economic thing.

Bella Caridade-Ferreira

It’s a life or death situation, right?

Henry Cobbe

Yeah, it’s a life or poverty situation.

Bella Caridade-Ferreira

Yes, exactly right.

Henry Cobbe

Unfortunately, the death is a foregone conclusion. So that was the first thing, we expected the suitability framework for retirement. The second was about the appropriateness of investment solutions to decumulation, and we very much maintain, and we agree with the regulator on this, that you can’t have investment solutions that are designed to grow capital being used for objectives when you’re designing to shrink capital. A portfolio that’s designed for one thing can’t be designed for the opposite of it.

Bella Caridade-Ferreira

Exactly right.

Henry Cobbe

The other thing we expected, and we got was that there be a clear obligation to make comparisons to the non-advised pathways and value for money considerations. So in the consultation retirement outcomes review, this is now logged back in the press, you can find these articles going back in 2018, 2019.

One of the key takeaways from the non-advised market was that advisers would have to compare their drawdown recommendations to non-advised pathways, a bit like the old RU64 rule with state comparing pension recommendations to stakeholder. So we see pathways as like stakeholder for drawdown and there was that obligation to compare, but it wasn’t quite clear enough just from the consultation, so one of the things that we fed back into the regulator was that there needs to be clarity on whether, and how those comparisons need to be made.

That clarity has come through in the suitability framework that the regulators outlined. So what we’ve got was in line with what we expected. Assessing suitability is different in retirement. Investment solutions are different in retirement and there needs to be clear comparison to pathways and the value for money considerations.

But in addition to that, the surprise is, not a curveball but like the wow that’s new, was the regulator did two things which they’ve never done before, that I can remember. Maybe other advisers will have different memories, but if you think about accumulation and risk profiling questionnaires, that really kicked off from 2012 when they regulated the FG1216 and talked about centralised investment propositions. And now, there’s no mandate saying this is what a good risk profiling tool looks like. This is what a questionnaire should look like. The regulator doesn’t tell advisers or technology providers how they should be doing this. They say you have to assess suitability.

Bella Caridade-Ferreira

Yeah, they’re not usually prescriptive. They don’t usually dictate how it should be done.

Henry Cobbe

Until retirement.

Bella Caridade-Ferreira

Until this time, what’s it done? Is this the retirement income advice assessment tool that it’s produced?

Henry Cobbe

Yes, the snappily named RIAAT, or RIAAT. I’m not sure if it’s RIAAT.

Bella Caridade-Ferreira

It’s a RIAAT, yeah.

Henry Cobbe

So I’ve never seen the regulator do this. They’ve never come out with something saying, like a Blue Peter, here’s what we prepared earlier, because it’s not usually their place to do so. But I think one thing that we found when we were speaking to, and we’ve been working with adviser firms for the last three years ever since pathways putting in place CRPs for them, centralised retirement propositions for them based on the kind of evolving guidance which wasn’t fully there yet, and one thing we always got back from advisers saying ‘well look, we know we should be doing something different for decumulation, but there’s nothing out there to do it with.’ There’s no tools, there’s no frameworks.

Bella Caridade-Ferreira

Is this the FCA sort of coming from a point, a place of exasperation with the industry going ‘for Christ sake you don’t know what you’re doing, and therefore we’re going to impose a basic framework’?

Henry Cobbe

I think the more genteel way would be we’re saying like, you know, let’s provide some additional guidance tools and resources to help ensure better outcomes, which is the same.

Bella Caridade-Ferreira

Which is basically the same thing, but you just said it in a nicer way. So Henry, the framework that they’ve put together, is it any good? Does it cover all the bits that it should cover? Talk me through that.

Henry Cobbe

So it’s incredibly comprehensive, and advisers, they’re able to download it themselves and take a look through and it is incredibly comprehensive. It is like whistles, bells, warts and all. But you know, it’s a spreadsheet with a huge number of data fields, and I think the feedback we’ve had from advisers looking at it is like, ‘this is way too complicated’, you know, it’s too comprehensive, so I think what will happen is that no one’s going to use their spreadsheet. But what people will use, I think what we’ll see is a technology providers, so the risk profiling people and the technology companies, I think what they will do and the back office systems, and this is a real shout out any back office systems listening, the back office providers should look at this tool, licence it, ingest it into their systems and to reproduce the questions that the tools are asking for, but in a way that can be logged and recorded on the advisers back office systems. So, I see it as a really useful starter, not a starter for 10 but a starter for 100.

Bella Caridade-Ferreira

Yeah, this is like a huge reference manual really that they can refer to, but for it to be useful, it does need to be sort of broken down into maybe bite sized chunks.

Henry Cobbe

Exactly. It needs to be online, it needs to be recorded, it needs to be client specific and it needs to be feeding straight into client’s back office. So I think what we’ll see is that I don’t think many, you know if advisers are stuck for ideas, they can download this spreadsheet and fill in one spreadsheet per client. If you’ve got maybe 50 clients that’s probably manageable or even 100. But for large firms, they’ll want an online version of that, and this is a call out to the tool providers.

Bella Caridade-Ferreira

Well, is this something you thought about doing yourself? An online version of this?

Henry Cobbe

So, we’re not a technology company that does online stuff, yeah. When we started it, we thought, we were going around saying someone needs to do a risk profiling questionnaire for retirement, someone, we call it a withdrawal profile questionnaire, and we’ve built one. So, we’ve got the set of questions and the frameworks but, actually, what we realise is if you start asking questions about retirement, after the first few questions, you’re basically into building a cash flow model.

Bella Caridade-Ferreira

Right.

Henry Cobbe

It’s all about, how much money have you got, how much money do you take out and how long have you got to live? Those are the three key variables.

Bella Caridade-Ferreira

So, the two are inextricably linked, right?

Henry Cobbe

The two are inextricably linked. So, we thought well, we know that there’s lots of well-known cash flow modelling tools out there. So, what we did is actually scout around the market seeing which of the cash flow models out there are configurable. And so what we’ve done with the firms that we work with is, we’re working with one particular cash flow tool where it’s configurable and we put our questionnaire into that tool, we also put the retirement income models that we’ve built into that tool and that way advisers can generate sort of stress testing and suitability reports, using the actual models they’re recommending from a standardised cash flow tool from that provider. So rather than trying to build a whole cash flow tool from scratch and be a new competitor we thought, let’s just get our questions into an existing, well established cash flow tool.

Bella Caridade-Ferreira

OK. Look, Henry, you work, as you said, you work with a lot of advice firms. Does your personal experience reflect the FCA’s findings? I mean, do you find that a lot of advice firms were sort of all over the place or, you know, was the sort of vast majority of the advice community doing things properly, and it’s just a few outliers or really was it a problem across the industry?

Henry Cobbe

I think it definitely was a challenge because if you think about it, pensions freedom was 2014. The FCA guidance is in 2024. So, there’s been a decade of like, what do we do? And I think I would concur with the FCA’s findings in regards, there’s a small portion that were trying to do the right thing, but without the tools to do it.

So the technology companies hadn’t really done comprehensive decumulation questionnaires. The ones that I’ve seen haven’t really been sort of necessarily fit for purpose, and we’re not technology, which we were asking technology companies to do it the way we wanted to do it, but they weren’t there. So there was a gap that way. So you had a small group of firms that were trying to do the right thing, but they didn’t really have the building blocks, i.e. the tools or the portfolios or the reporting to actually do it the way they should.

Then you had the vast majority of firms that knew they ought to do something, sort of feeling in their bones that, oh, this is a bit different, we’ve got to do something different, but again got stuck because like, well, where do we start? We don’t have any pointers. There’s no tools, there’s no resources, there’s no templates, this is different, we don’t know what to do.

And there’s a small minority of firms which I would say are laggards, they still haven’t done the 2018 requirements, which is prod, product governance rules. And they haven’t done, or they haven’t even got a CIP. So, you’ve had to have a CIP document since 2012. And sometimes they haven’t got that. They’re meant to have a product governance policy profile since 2018, they haven’t done that, and they’re meant to have had a CRP from 2021 or pathway comparisons 21 and they haven’t done that. So those laggard firms, they don’t have anything and that’s a small minority. But those firms really should have to just raise their game several steps.

Bella Caridade-Ferreira

That’s interesting. I’m a little bit surprised really that there are these laggard firms that are sort of, still struggling to do this after all these years, but I suppose nothing should surprise us.

Henry Cobbe

Small minority, the small minority, it’s a small minority.

Bella Caridade-Ferreira

The small minority. Yeah.

Henry Cobbe

The bulk know they need to do something different and want to do something different but are not sure where to turn.

Bella Caridade-Ferreira

Right. So, in the RIAAT tour, does the FCA provide examples of good practice and bad practice and so on.

Henry Cobbe

Not in the tool they haven’t, but in the thematic review they have and actually one of our feedbacks to the regulator when we talked in the beginning of this thematic review was, we asked them to outline examples of good practice and bad practice because we see those good practice and bad practice examples and we think it’s really helpful to see as a case study.

So, we see good practice as having a CRP in place as one thing. Bad practice is having nothing in place. So just of making it really clear of like, what does good look like and what adviser firms should be aiming towards. And that’s now been spelt out much more clearly thanks to the thematic review.

Bella Caridade-Ferreira

So just, let’s go back to one of the things that you talked about which intrigued me was, managing money, as if it was in accumulation, when actually it’s in decumulation. What are the sort of conflicts that you’ve seen there and what would you advise? What does the regulator expect to see?

Henry Cobbe

So, the regulator remains non product-specific, so they’re not endorsing any particular product or strategy. But they do highlight the differentiation. They do say, look, this is different objectives, it’s different solutions. They do highlight the differentiation, but they’re not product or strategies prescriptive as you’d expect. They never are.

Bella Caridade-Ferreira

So, what do you see? What are the main differences that you’ve seen?

Henry Cobbe

So, I’ll start with the fancy phrase and then work backwards. So, the fancy phrase is when you’re building portfolios to grow, it’s the classic thing, you’re aiming to maximise returns for a given level of risk. That’s your classic optimised accumulation portfolio and that’s called asset optimised investing. You’re trying to combine a range of different asset classes to get the best return per unit of risk, and then you have traditional different risk profiles, and you say, well, here’s our cautious balanced growth and that’s got you know 50, 60, 80, 100% risk budget etc

That is the entire accumulation market. Yes, you’ve got different tweaks and variations, but everyone’s pretty much doing the same thing or similar thing at the high level. Decumulation, you enter a world of what, in technical investment theory terms, is called liability relative investing. So, pension schemes like DB schemes, they have what’s called LDI or liability driven investing which you would have heard about with the gilts crisis, when you try and perfectly hedge future known expected liabilities. That’s a DB scheme. So, the way we see it with a SIPP client, these are not contractual future libraries. These are like; I think my client might be taking more out to fund their care home cost, or something. So, it’s an unknown future liability but it still works mathematically, in the same way as a known future liability which you want to hedge.

So the moving parts for liability relative optimisation is what is the shape and pattern of withdrawals over time and then you’re discounting that today and you’re trying to make sure, the same as a pension scheme, ‘does my pool of assets fund my expected withdrawals?’ So the same challenge that pension scheme trustees have for a huge pension scheme for a company is actually the same challenge that an adviser has for individual clients. And each of your individual clients is a bit like a pension scheme, either in a surplus, i.e. the market value of the assets is in excess of the present value of future withdrawals. Or they’re in deficit, i.e. the market value of the asset is below the present value of expected withdrawals.

So, it is a time value of money calculation and that’s why you need time oriented assumptions and you also need to know the shape of those withdrawals, which is why you need cash flow modelling. So, cash flow modelling is nice to have in accumulation, but is a have to have a decumulation because effectively you’re trying to match a portfolio against the shape and term of expected withdrawals. So, a totally different way of managing money.

Bella Caridade-Ferreira

Yes, I mean, so I’ve got a couple of questions off the back of that. You’ve talked about the sort of the whole pot, the retirement pot, you know and managing that. I’m assuming that it’s not that simplistic though really and that, I mean, you would break that into what your short term medium- and long-term needs are, is that the case?

Henry Cobbe

You can do, so there’s different ways of doing it with pension scheme assets and the DB pension scheme, it’s managed as a net present value kind of calculation. So, scheme assets versus scheme liabilities. But because of market risk, when you’re dealing with retail clients and it’s in an individual pot, you can manage it as one pot. But yes, what we found the most popular way for financial advisers in the US and Canada and Australia is to do what’s called the bucketing approach, the fancy word for it, if you think the bucket sounds too unfancy-

Bella Caridade-Ferreira

Yes, give us the fancy word.

Henry Cobbe

The fancy word is time segmented diversification.

Bella Caridade-Ferreira

Time segmented diversification, right.

Henry Cobbe

Yeah. So, you’re breaking a portfolio into different time segments and then you’re diversifying it across those different time segments. So, there’s a very neat way of thinking about this. If you think like, you know, every adviser will know this. You know, if your client says I need £100,000 as a deposit for a new house, you wouldn’t put them into the 100% equity market because that could go up or down 20% over the next six months. You’ve got no idea. It’s like you flip a coin.

Bella Caridade-Ferreira

Put them in cash, yeah.

Henry Cobbe

So, you’d have a near cash solution or cash solution because you’re matching that near term liability. But let’s say they said, ‘I want to buy a house in 40 years time’. Then you say well actually-

Bella Caridade-Ferreira

It’d be 100% equity, yeah.

Henry Cobbe

Exactly because you’re not trying to navigate liquidity risk or shortfalls, you’re trying to navigate inflation risk. So, advisers know in their hearts that time matters and what time segmented diversification is or bucket-based approach, is actually just matching the different risk return characteristics into these three different strategies.

So for a near term bucket and when we did a survey of advisers, we came back saying that one to three years, you wouldn’t put your money in the equity market for three years if you needed it in three years time. That would be where you want to basically maximise liquidity and minimise downside risk.

Then you might have more like a medium-term bucket where you want a little bit of growth coming through. But you still want that keen focus on downside protection because you don’t want any sequencing risk problems and so that way if you have five years allocation of income into that, then that gives you the first eight years covered. Then the balance i.e. years nine onwards can go in kind of a growth portfolio and run with the markets and that way effectively all you’re doing is taking the edge off this sequencing risk and sequencing risk is two things; one, it’s what markets are doing and whether you live in a lucky or an unlucky period of time. So, clients who started withdrawing in December 2021 had quite an unlucky time because markets started nose diving then, whereas advisers who started withdrawing in October 2023 had a very lucky time because markets had gone up and up and up, so that every time they take money out, it keeps on growing. So sequencing risk is about: are in you a lucky or unlucky time of period and also how much are you taking out related to the pot? Because if you’re taking out 10% of your pot. It’s definitely not going to last 20 years, is it?

Bella Caridade-Ferreira

No.

Henry Cobbe

So, and this is a really important part, there’s no single product that can mitigate sequencing risk and you have a lot of manufacturers saying, ‘hey, this can mitigate sequencing risk’, no, it can’t. The only thing that can mitigate sequencing risk is having a good adviser who’s done a cash flow model saying you’re taking out too much, you’re taking out too little, this is how much you can afford to take out.

Bella Caridade-Ferreira

So, this is really interesting because you know basically what you’re saying, we all know in our hearts all these things, but the cash flow model systematically plans for it and makes sure that you stay close to what the client needs and the client’s future liabilities as you said.

Henry Cobbe

Exactly.

Bella Caridade-Ferreira

So, I mean, the FCA also again sort of stepped away from what it usually does and published a cash flow modelling article I think.

Henry Cobbe

My eyes lit up, my heart jumped for joy. I was like ahhh.

Bella Caridade-Ferreira

Did it really?

Henry Cobbe

It did. No, it did.

Bella Caridade-Ferreira

Oh, you’re such a geek, Henry. You’re such a geek.

Henry Cobbe

Well, everyone’s got different hobbies. One of the things that we fed to the regulator again was about internal consistency of cash and modelling assumptions because again so, best practice firms we’ve seen and we’ve helped actually, some national firms do this is like standardised assumptions across the group, so that it doesn’t matter whether you got advice firm in the South and one in the North, one in Scotland, one in Northern Ireland, they’re all doing the same standardised assumptions because we all know modelling risk is the same for everyone.

There’s always the risk of what’s called garbage in, garbage out. So, any adviser can probably get a cash flow model to say whatever they want it to say, and that’s the danger, in a way. So, you could make a cautious portfolio look this, you can make a growth portfolio look that, you can use this growth rate and then we’ll find, anyone can manipulate a model to say pretty much whatever you want it to say. And that’s a danger. So, one thing that we think is really important is that firms, particularly if they’ve got a national footprint, regardless of which office you walk into, and regardless of which adviser you meet.

Bella Caridade-Ferreira

It’s the same.

Henry Cobbe

The same set of assumptions would be put through the same process, but it’s got to be internally consistent. Otherwise, it really is open to manipulation and bunker.

Bella Caridade-Ferreira

And is that what the FCA has done with this article? Has it set out what should be included and excluded?

Henry Cobbe

Yeah, at a high level it’s made the case for that internal consistency. So that there’s this kind of, you know, it doesn’t prescribe what level should be set, it doesn’t say you should all use a 2% inflation not a 2.5% inflation rate. It doesn’t say you should all use a 1% OCF or 1% cost assumption or a zero-cost assumption. It just says whatever you do do, it’s got to be internally consistent so that a client speaking to an advice firm throughout the firm, that if an identical client spoke to three different advisers at the same firm, the cash flow model outputs would be identical as opposed to depending on which adviser they met and what assumptions they used.

Bella Caridade-Ferreira

Fair enough. But does it say you need to take into account OCF’s inflation? Does it set out those points?

Henry Cobbe

Yes, but it doesn’t say what numerical values.

Bella Caridade-Ferreira

It just says you need to take into account inflation. It’s up to you to decide what that inflation rate is for example, yeah.

Henry Cobbe

Exactly. So the good practice example is firms that have a ‘here are our centralised cash modelling assumptions, this is what we’re using for cost disclosures, this is what using for inflation assumptions’ and then the other really big one and a lot of firms do this is, they use a stress test and a kind of simulation of what could happen in a bouncer using a standard balance model from the cash flow tool, which bears absolutely no resemblance whatsoever to the recommended solution that they’re actually going into. So they’re stress-testing the scenarios based on something that the client isn’t invested in and the clients are invested in something that hasn’t been stress-tested as a scenario. And so that is another point of internal consistency that we’ve really advocated very hard to adviser firms we’ve worked with and I think that is referenced as well in this cash flow modelling best practice notes. And actually, one of the things we like with the particular tool that we’ve kind of been working with indirectly, is that you can actually configure the stress tests to actually reflect the models that you’re actually using rather than a theoretical model that you aren’t using.

Bella Caridade-Ferreira

So, let me just summarise this because I just want to get this completely straight in my head, so a lot of companies were doing all this cash flow modelling and then stress testing investment solutions that were not what the client was invested in, is that right?

Henry Cobbe

Yeah. Because they just say, ‘stress test a balanced risk profile’ and then they do it based on a theoretical balanced portfolio and that isn’t actually what the clients invested in. They might be invested in a portfolio called balanced, but the asset location of what they’re invested in is not the same as the allocation of what’s being used in the stress test.

Bella Caridade-Ferreira

So that’s interesting, isn’t it? That’s just a lack of joined up thinking through a lot of solutions and and clearly-

Henry Cobbe

It’s not the advisers fault though, the cash flow modelling tools out there, not all of them can do that like actual configurability where you can actually put in your actual model and stress test that as opposed to the standardised one.

Bella Caridade-Ferreira

Right. OK. OK. That’s a really fair point. So basically, again, for all the tech providers and all the cash flow modelling tools out there, you know this is what you need to do. Make them configurable basically.

Henry Cobbe

Yeah. And I’ll give you one example of another, again I wouldn’t say it’s bad practice, at least in cash flow modelling, but like a room for improvement area, is we found firms that would say for cash flow modelling assumptions, we use a 5% growth rate, regardless of what portfolio in. So let’s say you know a low risk portfolio, let’s say a 40% equity portfolio, they’ll use a 5% growth rate. If you’re 60% equity portfolio, then 5% and if you’re on an 80% equity portfolio use a 5% growth.

Bella Caridade-Ferreira

Well, that doesn’t make sense. Even a school child would know that would be wrong.

Henry Cobbe

Bella, I think that’s quite a judgmental statement that you made. I think that there are pros and cons of cash flow modelling. It is illustrative of values and it’s a good step, step one, you definitely get a gold star, no you get a silver star for using cash modelling at all in decumulation.

Bella Caridade-Ferreira

Yes, fair enough.

Henry Cobbe

But then you might get, well now they don’t do crosses anymore, you might get these little dots by their homework. You know how they don’t cross out?

Bella Caridade-Ferreira

Don’t they do crosses anymore? Gosh, time has moved on.

Henry Cobbe

No. In my day they used to rip it in half actually.

Bella Caridade-Ferreira

Oh yeah, they put a big red line through it and say start again, yeah.

Henry Cobbe

So, you might get a dot saying next time think about a linear assumption that more closely aligns to the equity risk allocation of the portfolio, as a suggestion for improvement.

Bella Caridade-Ferreira

Right. I see. I see. So, look, the cash flow modelling article has been helpful overall to the advice industry?

Henry Cobbe

I think so, I think so.

Bella Caridade-Ferreira

OK, so we’ve seen the regulators sort of come out quite strongly on this and this is obviously linked to consumer duty and consumer outcomes and so on. What in your view are the next steps for advisers? What do they need to think about now?

Henry Cobbe

So, for the adviser firms that have already got a CRP, a centralised retirement proposition, documented and there’s not many and that’s definitely the firms that we work with already. But it’s just time for a refresh and to make sure that all the latest thinking has been reflected and that should be like moving from 90% covered to being 100% covered.

For the vast majority of firms. I’d probably say the vast majority of firms already have a CIP in place, a centralised investment proposition, it’s time to extend it and create a CRP, which is a centralised retirement proposition, or we call it a CIRP centralised investment and retirement proposition, this is just one big document.

So, it’s about adding on that extra chapter and going through that advice process.  It’s not just saying we use this for retirement, it’s like what is our advice process on retirement, how do we assess suitability? What tools do we use? If we use cashflow modelling, which cashflow modelling tool do we use and why? What assumptions do we use as a centralised firm for so, everyone’s modelling consistently and then what are the investor solutions we’re using that align to that framework?

Also how does that compare to pathways in terms of structure, investment solutions and pricing because what the regulator was very clear about again in 2021 retirement outcome review, they said to the non-advice providers, the Hargreaves Lansdowns and the interactive investors and the kind of direct insurers that providers for drawdown, non-advice providers of pathways should be mindful of the 0.75 all in workplace pensions price cap. Excluding advice, obviously, because it’s non-advised.

Bella Caridade-Ferreira

To basically be mindful as in, stay within that 0.75%, basically.

Henry Cobbe

Yeah, so a bit like, you know, if you’re hanging around some dodgy end of New York and someone corks you with the baseball bat and says they want you to be mindful of something. You generally think, well, he’s carrying a baseball bat. I’ll definitely be mindful of that. So be mindful.

Bella Caridade-Ferreira

He’s got he’s got the baseball bat hidden behind his back, but yeah, he’s carrying it for sure.

Henry Cobbe

Yeah. I’d like you to be mindful of the, you know, protection money you’re gonna pay me.

Bella Caridade-Ferreira

As he slaps the baseball bat into his hand.

Henry Cobbe

So be mindful. So basically, what we mean by that, what we think, in the non-advised market that was very straightforward because it was like, platform costs and OCF of the underlying product, and actually with, if you look at what Hargreaves and interactive did, they actually built things that were all basically around 0.5 all in excluding advice. They took that mindful warning very seriously and came in at 0.5. So, we think that basically what it means is if you think platform plus DFM fee plus portfolio OCF. Or if you’re not using a DFM, if you’re just using for funds, then platform plus funds. But funds have got to be aligned to the retirement solution, of which there aren’t that many.

Bella Caridade-Ferreira

So, if you add 0.5, which is roughly where the non-advised people have come in and you add an advice fee. What’s the advice fee, roughly, you’re looking at 1.5 in total, is that right?

Henry Cobbe

Well, well, so no, so the workplace pension price cap is 0.75. For pathway, for retirement the regulators ask people to be mindful of that. So, let’s say it’s 0.75 is the all in cost excluding advice, because obviously pathways is non-advised. So, we think any any investment solution for retirement should be 0.75 or lower. So that includes platform, MPS fee and OCF for the funds.

Bella Caridade-Ferreira

But it excludes, does that exclude the advice?

Henry Cobbe

Yeah, it excludes advice, because the ‘mindful’ comment is only in regard to the product cost, the product manufacturing costs.

Bella Caridade-Ferreira

Right. Fair enough. So that’s what I meant. So, if you added in advice, you’re looking at 1.5 to 1.75.

Henry Cobbe

Yeah, I’d say so. I think that, yes, that’s the short answer. So that is kind of where, pricing I think sits and but also you know what’s really handy is in a way the whole point of pathways is it’s non-advised, it’s generic in nature, right. So, it deliberately doesn’t take account of personal circumstances. It’s not a personal recommendation. It’s like based on your click through choices you’ve chosen this pathway, off you go.

So the value-add opportunity for advisers is huge because you’re saying look, in terms of the investment solutions, we’ve got this investment solutions framework, we’re asking similar questionnaires to pathways, we’ve got a different array of investment solutions at the same price point of pathways, but what we actually recommend to you is based on your unique personal attitude to risk, capacity for loss and most importantly cash flow model, and we’re suggesting advisers review that cash flow model each year because all those variables change.

So, the value-add for advisers is there and also, I think advice matters most at retirement because that’s when your wealth levels are at the highest, and where the risk of messing up is also at its highest and the risk of a poor outcome, i.e. outliving your assets is material to your well-being. So this is the great value-add for advisers.

Bella Caridade-Ferreira

Oh, it’s a massive value-add and also, I mean you’re absolutely right, advice does matter most at retirement. I mean if you think of all the people, because of pension freedoms, you know, so there can be anyone who’s coming, retiring with a defined benefit pension could be extremely wealthy. If they do decide to transfer that out or do, you know, do whatever that they want to do. So, somebody who’s had a steady job could suddenly find themselves with a lot of money and that makes people really nervous, doesn’t it?

Henry Cobbe

It is, and also because one thing we’ve seen from when we were doing the workplace pensions work with the master trusts, they did a lot of surveys around people’s understanding of life expectancy, and people basically underestimate life expectancy. You know, everyone thinks I’m 70, I’m into old age now. Now 70 you’re a spring chick.

Bella Caridade-Ferreira

You’re young. You’re a spring chicken, yeah, some of us won’t retire until we’re 70.

Henry Cobbe

Exactly so, people think well, life expectancy is 85, roughly speaking. That means half the population will live way beyond 85.

Bella Caridade-Ferreira

But actually, life expectancy, that’s the average. But the modal is actually higher. The modal life expectancy is 89, for women, I think. So, it’s already high. Cash flow modelling is really important. I mean I always say to young people, you know, like my kids who are 30 and 33, I say to them, you’re going to work for roughly 40 years and during that 40 years, you’re gonna have to save for what’s probably going to be the next 40 years. That’s the reality, is that people are going to live to 100, so just sort of telling them that, that actually during the 40 years that you’re working, you’ve got to set aside enough to last you for the next period when you’re not working, that should hopefully drum into some of these young ones that they need to save for retirement.

Henry Cobbe

Absolutely and I think in a way, I think that’s, in accumulation coming back to that kind of differentiation that is the key. Anyone who gets saving in any way, gets investing, that’s a good thing. As long as you’re going into risk assets, so like whether it’s 60, 80, or 100% equity. Doesn’t really matter as long as you just get investing, paying where you keep topping up and the earlier you start the better. I wish I’d started, you know, much younger and my children are lucky.

Bella Caridade Ferreira

Don’t we all? Yeah, don’t we all?

Henry Cobbe

I’ve been going into their SIPPs since they were born and they’re jolly lucky there. I hope they thank me accordingly. At least send me off to Switzerland to go and have a sort of Dignitas moment.

Bella Caridade-Ferreira

Well, they might do that, yeah.

Henry Cobbe

So, it’s really essential. But, yeah, the mass of pensions is the same, whether it’s a DB scheme or workplace scheme or a SIPP. You’re putting money into a pot, to take it out later and mathematically, you can’t make 30 years of drawings on 10 years of contributions you’ve got to pay in all your life so that you can fund that in retirement, and that is the whole life cycle investing concept.

Bella Caridade-Ferreira

Indeed, indeed, although it’s never too late to start, right, let’s just emphasise that for anyone who’s listening and panicking that they haven’t done enough.

Henry Cobbe

No, but it’s absolutely key and I think that’s what we say about this whole difference in the accumulation, decumulation you asked this earlier saying, you know, what is the difference, what is that differentiation?  We talked about investment strategies, asset optimisers for liability relative but in the economic terms it’s very simple. When in accumulation it’s about contribution rates and you’re putting earned income into investment capital and decumulation, it’s about converting your investment capital into retirement income via withdrawal rate. So, it’s literally money in, invest, money out and they are the mirror image of each other.

Bella Caridade-Ferreira

Indeed they are. Henry, thank you so much for all of this.

Henry Cobbe

I thought we just started. We haven’t got to chapter two, haha.

Bella Caridade-Ferreira

We haven’t quite got to chapter, well, Henry will be joining us regularly. We’ll be doing podcasts on various themes for the adviser community, and he’ll also be writing a blog. To all our listeners, please watch out for that. I’m sure they’ll be very, very interesting. If you would like to know more about Henry and Elston consulting and how they can help you with your centralised retirement proposition, please contact Henry at, well, it’s Elston Consulting, isn’t it? What’s your website address? Tell us what your website address is.

Henry Cobbe

Yeah, so, the website is actually elstonsolutions.co.uk because under that banner we have an investment consulting side, which is Elston Consulting. We also have an MPS solution called Elston Portfolio Management, yeah, elstonsolutions.co.uk.

Bella Caridade-Ferreira

Excellent, there you are. So, Henry is the voice of reason on the retirement income solution problem, so that should be your first stop. Henry, thank you very much for your time today. Really appreciate it, and I look forward to doing more podcasts with you.

Henry Cobbe

Thank you, Bella. Thank you for having me on.

Bella Caridade-Ferreira

No problem.

Henry Cobbe, founder and Head of Research, at Elston Consulting, talks to Bella about the FCA’s findings following its thematic review of retirement income advice, why it matters to advisers, and most importantly, what they need to do about it.

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