Advisers should shift to ‘outcome-focused’ retirement investing

The advent of pensions freedom and auto-enrolment means it is time for advisers to rethink traditional retirement investing strategies, writes Jenna Towler

The advent of pensions freedom and auto-enrolment means it is time for advisers to rethink traditional retirement investing and look toward “cradle to grave” investment strategies, according to Birthstar.

Head of research Henry Cobbe predicts a rise lifecycle investing through target date funds, currently popular in the US, among retail investors as they are “easier to use and simpler to understand” than current investment strategies.

He said investment strategies must move to become “outcome orientated” to better serve savers.

“Advisers have a key role to play,” he added.

The firm has launched series of CPD papers for advisers focused on target date fund education. The second in the series, Lifecycle investing with target date funds, will be released this week.

The paper outlines why the firm believes target date funds are the next step in the evolution of defined contribution investing.

The paper said cost-conscious consumers, as well as regulatory changes such as pensions freedom, were driving growth in more innovative solutions.

Lifestyle investing has traditionally put investors on a path towards buying an annuity.

[su_note note_color=”#d2d2d2″ radius=”0″]

Further reading: How asset managers are meeting the pensions challenge [/su_note]

However, pension freedom and choice removed that requirement meaning shifting from equities into bonds at a certain point before retirement will no longer suit every future retiree as they may want to remain invested via drawdown.

Cobbe said target date funds were an alternative and were already used by many of the auto-enrolment master trusts, such as NEST which has more than a million members.

He said: “Target date funds are gaining renewed interest in the retail funds sector and are used as defaults within workplace pensions.

“The investment ‘time horizon’ is a key differentiator between risk profiled funds and target date funds.

“Target date funds aim to match objectives within the investors lifecycle as they move from accumulation to decumulation.’

Cobbe added advisers have a key role to play in the application of target date funds as clients will all have different life expectancies, different investment time horizons and amounts of money to invest. He also said everyone would have different sustainable withdrawal rates.

Academics

He said while this was a new way of thinking in the retail space the academics behind it were not new as target date funds were popular in institutional investment.

“The investment science is not new, it is quite established. It is moving institutional into the world of retail.”

Earlier this year Birthstar, working with Architas, launched seven retail funds that follow an age-based strategy more commonly used by defined contribution (DC) auto-enrolment schemes.

The Architas BirthStar Target Date funds are managed by AllianceBernstein in line with a ‘target date’ – the point at which an investor wants to start withdrawing from their fund.