Passage between the stages within a risk channel (the ‘glide path’) can be managed systematically.
The information need to match a client to a model at each stage consists of the planned spending profile at different ages (hence the ‘duration’ of the plan), risk tolerance and market conditions.
A modelled approach to drawdown is compelling on many fronts. It can make portfolios more resilient to stress, which is important to investment professionals. Changing the entire conversation to one about spending outcomes turns what looks like an investment-management method into a continuous process of financial planning.
The conversation is not just based on changes in the client’s circumstances but also progress towards their goals and it puts the adviser at the top of the value chain.
Compliance risk is also better managed because the process generates its own audit trail of logical and consistent discussion and decision.
The inputs needed from clients will be familiar to advisers accustomed to cash-flow models. But there the comparison ends. What need to be modelled are the outcomes of a lifetime plan, not a static portfolio. It can start at any stage, when accumulation begins, and continue as long as an annuity is avoided.