In this post, Pete and Matthew Yeates from 7IM discuss the potential differences in attitude to volatility in risk in retirement.
PM: My next question was going to be about attitudes and behaviour, particularly around volatility. I’ve got one of those career-defining stories about a client who’d built a successful business and always been in control.
When he sold it and invested some of the money, we didn’t do a good enough job in ascertaining how he would behave, because he hated not being in control. Is that your experience – do you see a marked difference between cumulating investors and decumulating investors when it comes to concern over volatility and risk?
MY: I think there is an element of that. There is a lot of academic work that would suggest that people’s inherent behavioural traits through time are going to be constant. If you’re a risk-taker and you like sky-diving before you retire, you’re going to be a risk-taker when you retire. Your approach to volatility comes in the same manner.
In reality, there is a difference. I think one of the things that can lead to that is for so many people, actually retirement is the first time that they have a meaningful amount of money to invest. For many people, it’s when money comes out of a DB scheme, when it’s seemed distant before, they suddenly have money to invest, and it’s not the company they work for making those decisions for them.
Just that change, the shift for most people who start investing in retirement, it’s really significant. But I think it also goes to that element of, because things suddenly seem short-term about providing that income, it can worry people a little bit more.
I think that’s natural for that to be the case, even if some psychology studies would tell us that those preferences should be constant through time. For many, it will be that first time they’re able to invest. For them, anything that’s new will be scary straight away.
Volatility doesn’t matter, though, unless it causes people to do things which DO matter, and the big stress test for a financial plan is not a global financial crisis or COVID19, it’s something happening and people pulling money out. That’s what matters. Everything we do when we’re thinking about investing for retirement is about stopping people doing that and making them feel comfortable.
PM: Having what the regulator likes to call a ‘centralised retirement proposition’ – usually a term used for advice practices – what is the way we advise clients to invest in retirement? That’s such a hot topic, and has been for the last 18 months to two years. 7IM have their retirement income service, so what was the itch you were trying to scratch with that? What was the thought process? Was it a brainstorming board meeting?
MY: It came from a couple of different places. As alluded to earlier, I’d written some white papers about investing for retirement, which we’d published, but we also had thousands of clients we were running retirement money for.
We had good outcomes across all of those, but what we wanted to get to, which is what you referenced there as the centralised retirement proposition, is a consistent framework and format for approaching those same problems.
We wanted to make sure that all clients, no matter how bespoke their needs, that we could support a consistent income aspiration or time period it had to last for each of them. For us, it came from solving that internal problem – we’ve got lots of academic research and models we’ve developed over many years, so we’ve got to allow people to access those.
How can we ensure that advisors working with clients can access those, to ensure we’re getting good, consistent outcomes? It came from trying to tie up some academic research and the real-world usage of that.
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