Traditional investment models are structurally failing clients in the critical years approaching retirement, exposing advisers to heightened regulatory, suitability, and client behavioural risk.
Author: Paul Hogg, 8AM Global
While much of the UK advice market has evolved over the past decade – see centralised investment propositions, improved compliance frameworks, stronger client communication standards and, in many areas, financial innovation – the core tools the industry uses to guide clients into retirement remain largely rooted in an accumulation era that is misaligned with how people actually retire, and what security they need after retirement.
The result is a systemic blind spot in the five to seven years before and after retirement – a period acknowledged in many quarters as the “retirement danger zone.”
A bad year at the wrong time can undo decades of careful saving. Volatility that felt acceptable at 45 becomes catastrophic at 62, yet many of the solutions advisers rely on were built for multi-decade wealth accumulation, not fragile transitions into drawdown.
The retirement landscape has changed – the models generally haven’t.
Traditional glidepaths were originally constructed for a retirement model where annuity purchase dates created a neat “end point” for portfolio design.
That model broke down more than a decade ago, as retirees increasingly chose flexible drawdown instead. Yet glidepath logic – shifting from higher volatility assets into lower volatility ones – has not materially evolved to reflect what happens when clients continue to invest through retirement rather than crystallise at a single moment.
The issue is no longer simply that annuity assumptions are outdated.
It is that the tools used to de-risk presume time horizons that no longer exist. Many of the underlying building blocks in “risk-off” glidepaths behave very differently over five to seven years than they do over 15 or 20, and the very volatility assumptions that make these allocations look suitable on paper break down in the window where sequencing risk is most unforgiving.
The investor often needs to invest for 15+ years to give themselves the best chance of attracting the low volatility promised by the portfolio.
Increasingly, defined contribution (“DC”) pots are materially larger than in previous generations, meaning that a client’s sensitivity to loss is incrementally higher. Under Consumer Duty’s value-for-money lens, advisers must now justify not only the choice of solution but the effect of short-horizon volatility on the client’s withdrawal plan.
The advice market now has retirees with six-figure or seven-figure DC pots, no annuity plan, and a broad expectation of flexible drawdown. Pre-retirement ramps still behave as if clients are exiting the market neatly at retirement. In reality, they’re staying invested – and volatility in that ‘danger zone’ behaves very differently than it does over multi-decade horizons.
Client psychology becomes the limiting factor.
The industry is not only fighting the maths – it is fighting human behaviour.
Pre-retirees are profoundly loss-averse.
They do not view even a 5% drawdown as “volatility” – they view it as lost holidays, reduced income, or a delayed retirement (loss sensitivity, which is increasing, as stated above).
Pre-retirees also do not think in standard deviations.
They think in months of income. They think in retirement dates, lifestyle, longevity, and so on. And yet we routinely present them with portfolios that require a long time to deliver peace of mind required in the short term”
This fragility is further compounded by sequencing risk – the risk that withdrawals begin during or shortly after a downturn, permanently locking in losses and reducing sustainable income for decades. For accumulation investors, sequencing is inconvenient; for retirees, it is existential.
Regulators are raising the bar.
Consumer Duty has fundamentally altered what “suitability” means in the pre-retirement zone. Advisers must now justify not only product choice and charges, but timing, volatility, outcome uncertainty, and client comprehension.
Consumer Duty has put a spotlight on outcomes and value. That makes it much harder to justify exposing a client to downside market risk on the eve of their retirement, especially when the client’s tolerance for drawdown has collapsed and the maths around sequencing is unforgiving.
Mismatch with centralised investment propositions
Most centralised investment propositions (CIPs) and model portfolio services (MPS) are designed for accumulation. They assume volatility management over longer time horizons and that standard long-only portfolio theory is suitable beyond retirement.
Pre-retiree psychographics share none of these characteristics.
But such portfolios end up being used by default – not because they are fit for purpose, but because alternatives generally do not exist within the CIP.
This creates tension between:
- what the client feels
- what the regulator expects
- what the portfolio delivers
- what the CIP is designed to support
This tension is where regulatory risk, behavioural risk, and suitability risk collide.
Why this matters now.
The scale of the problem is growing rapidly:
- The UK’s retiring population is expanding
- DC pots are materially larger than in previous generations
- Defined benefit schemes have declined sharply
- Flexible drawdown has replaced annuities as the default
- Consumer Duty is raising the evidentiary bar
- Platform-based CIPs are now a dominant distribution channel
Put simply: the demand for precision in the danger zone has never been higher, and the industry’s tools have never been more outdated for that task.
A call for industry acknowledgement!
Addressing this danger zone will require the industry to recognise that non-traditional volatility mitigation should not be an optional extra reserved for esoteric products or niche strategies – it must be core to retirement planning.
Advisers do not need new buzzwords or speculative asset classes. They need tools that behave predictably, map cleanly to advice processes, and reflect the lived reality of clients approaching drawdown. The status quo asks advisers to bridge that gap manually. That isn’t sustainable.
This content is intended for financial professionals only. These are the author’s views at the time of writing and may be subject to change. This content is not intended to provide the basis for any investment advice or recommendation. Any forecasts, figures, opinions, tools, strategies, data, or investment techniques are included for information purposes only.
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