The Need for Customised, Goal-Based Investing

The complexities of final-salary pension transfers highlight a broader issue in the investment industry: the lack of tailored, outcomes-driven solutions to replace generic portfolio approaches. Many investors require solutions that clearly define financial goals, constraints, and risks, yet standardised investment products continue to dominate.

This shortfall is not limited to pension transfers. The same fundamental flaw—the failure to quantify trade-offs in a meaningful way—is evident in past failures of financial planning, such as the widespread underperformance of with-profits mortgage endowments.

The investment industry has long relied on generic portfolio profiles based on volatility, without adequately addressing:

• Defined outcomes at specific timeframes.
• Consequences of exceeding or falling short of financial targets.
• The need for a tailored risk approach based on personal financial constraints.

Despite growing recognition of these issues, the industry has been slow to evolve, with mass-market digital advice tools (robo-advisers) often replicating standardised models rather than pioneering truly customisable solutions.

The Failure of Conventional Investment Solutions

1. Defined Benefit Pension Transfers: A Case Study

Transferring out of a Defined Benefit (DB) pension means giving up a guaranteed, inflation-protected income in exchange for a capital sum that must be invested to generate an equivalent or better income. The challenge is quantifying:

• The expected range of future incomes from the transferred capital.
• The risk of shortfall versus the potential for higher returns.
• The impact of different investment strategies on retirement security.

Standard investment approaches fail to measure these trade-offs properly, leading to regulatory concerns about poor transfer advice. The Financial Conduct Authority (FCA) has identified systemic failures in the way advisers approach DB transfers—largely due to a reliance on generic risk-return assumptions rather than individualised outcome modelling.

2. The Mortgage Endowment Crisis: A Similar Pattern

With-profits mortgage endowments were widely sold on the assumption that investment growth would be sufficient to repay mortgage debt in full at maturity. However, the investment models used were:

• Too simplistic, failing to account for realistic downside risks.
• Not stress-tested to assess the likelihood of falling short.
• Designed to fit standardised profiles rather than the needs of individual borrowers.

The failure of mortgage endowments illustrates the same problem that plagues DB transfers: a lack of quantifiable trade-offs and risk assessments in investment planning.

3. Industry Acknowledgment of the Problem

Even industry professionals recognise these shortcomings. In 2009, the Edhec Risk Institute criticised standard wealth management practices for failing to customise portfolio solutions to clients’ specific needs:

“Providing several profiles, expressed in terms of volatility... but the client’s specific objectives, constraints and associated risk factors are simply not taken into account in the design of the optimal allocation.”
(Edhec Risk Institute, Asset-Liability Management in Private Wealth Management, 2009)

Despite this acknowledgment, most firms have resisted moving beyond standardised solutions—even as liability-driven investment (LDI) techniques have become common in institutional pension fund management.

Drawdown: The Biggest Unsolved Problem in Personal Investing

1. The Complexity of Drawdown Planning

The most significant application of goal-based investing today is drawdown—the process of converting capital into sustainable income during retirement. This is a broader version of the DB transfer problem, as it involves:

• Defined spending needs over multiple years.
• Constraints on running out of capital before an assumed lifespan.
• Balancing risk and reward to maximise lifetime income.

Unlike annuities, drawdown income is not guaranteed, meaning it requires a robust strategy to manage investment risk and longevity risk. The challenge is to balance four key variables:

1. Resources – The capital available to fund drawdown (including savings, pensions, and investments).
2. Time Horizon – The expected duration of withdrawals, from retirement to a prudent assumed lifespan.
3. Risk Approach – The level of investment risk taken to balance security and potential returns.
4. Outcomes – The desired income levels in real, after-tax terms, ensuring spending power is maintained.

2. Why Standard Solutions Fail in Drawdown

Most conventional investment approaches fail to structure drawdown effectively, relying on:

• Static asset allocations, which do not adapt over time.
• Standardised withdrawal rates, which may be too aggressive or too conservative.
• A lack of stress-testing, meaning investors do not see the range of possible outcomes.

True drawdown planning should be:

• Holistic, incorporating all available resources (including ISAs, taxable accounts, property, and potential inheritances).
• Dynamic, adjusting investment strategies as spending needs change.
• Probability-based, so investors understand their odds of success and failure.

At Fowler Drew, we use a stochastic modelling approach, which allows us to:

• Quantify the probability of achieving spending goals.
• Test the resilience of plans against market downturns.
• Help clients make trade-offs between risk and income stability.