Is retirement income advice a science or an art?

The question was prompted by the following:

• A series of articles on the use of Artificial Intelligence (AI) in the financial advice process;
• Regular debates with advisers on how they would deal with particular issues - it is obvious that many different opinions exist;
• Finally when things are not going as well as they should be, for example, transfers from defined benefit pension schemes, is the role of the regulator and Ombudsman to ensure the correct processes have been followed? Or should they be forensic in their investigations to determine what the right solution should have been?

If, for any given situation, there is only one answer, the correct one, then AI will be able to take over much of what advisers do and the human element could all but be removed from the advice process.

Regulators would just check what the AI machine was doing to arrive at the correct solution. Would the regulator be a separate AI machine that ‘learnt’ its skills from a different base? This would be fine until the two AI machines disagreed. Which would have primacy? If it is the regulatory AI machine, would it have to teach the advising machine the error of its ways so that it arrived at the correct answer in future? This could be an interesting development.

And the big question of course is, where would humans sit in such a world?

Whenever a debate ensues about financial advice it is interesting to see many human frailties exposed. These are often exposed as product prejudices. Some financial products are like Marmite, they are either loved or hated. Equity release certainly falls into this category; annuities too are not everyone’s cup of tea.

Bad experiences that are never forgotten, mean that advisers will avoid using certain product providers. This can even go as far as how well the adviser relationship is with the people they have to deal with at a particular organisation. AI should not have such prejudices, unless of course its software is incompatible with certain product provider’s systems.

Can tax cloud judgements? Avoiding paying tax rather than looking at the comparative net positions is a prejudice that humans often display. “You must take tax-free cash because its tax-free,” being one such example.

However, AI would look at the commutation terms on offer and from some DB schemes conclude that unless there was a need for a lump sum it may be better value, particularly to a healthy individual, to take taxable pension income instead. In a DC world, why must the lump sum be taken in that form when the alternative of taking it as tax-free income is available?

Regulators, believe it or not are human. Their own prejudices are exposed by a starting position that pensions must be used for lifetime regular income. However, there are many factors that should influence that decision. The size of the pension available; the other pensions that may be available; and at a time when many cannot produce the retirement income they desire from their pension savings - what other assets, including homes, businesses and other savings they have to meet their objectives.

The most inconsistent of all the components in advice is the person being advised. They will, by the time they reach retirement, have such a number of personal characteristics that will make them almost unique. Add their personal wealth situation, their personal prejudices, and their objectives for retirement, and they have become almost unique. Does their personal situation mean additional guaranteed income is less or more valuable to them than the mathematical value that may be appropriate to the average person?

As can be seen, many judgements have to be made. Many of them will not be based purely upon mathematics. This is why I believe retirement income advice is an art. The retirement income adviser is basically painting a fresh ‘masterpiece’ for each client. The test of the masterpiece is whether it works for the client and delivers the retirement they are looking for from what is available. The components that will influence the masterpiece depend upon lots of data analysis. This is where technology will used more and more, keeping the analysis of the data rational and overcoming prejudices.

Yes, retirement income advice is an art. However there is a lot that technology can do to help paint the very best pictures.