While there is a clear trend towards increasing numbers of consumers, especially younger ones, taking a self- directed approach to their financial planning, the at-retirement market generally and drawdown particularly is a sector where consumers are likely to continue to seek professional advice. The sheer size of the wall of money heading towards retirement also means that this sector will probably prove the most fertile ground for advisers in the post-RDR world.
Given the extent of legislative and regulatory change over the last two years, it would be reasonable to expect that the drawdown sector would be brimming with innovation. Sadly, our research team’s dialogue with advisers in preparing this research suggests this is far from the case. Perhaps the sheer volume of system changes have constricted the capacity to innovate. However, against the background of an unprecedented level of market volatility, surely there is a need for new and advanced tools to help advisers monitor the performance of their client’s funds in the drawdown phase.
Given that once clients have reached this stage of life, they have little, if any, capacity to acquire new sources of income, so preserving existing cashflow must be paramount. If this is the case, perhaps this sector more than any other should be influenced by the FSA requirements around assessing suitability. While it must be welcome that, somewhat belatedly, the regulator has recognised the need to focus on more than just customer attitude to risk, the new requirements around capacity to risk and risk tolerance provide interesting challenges to the adviser community, not least, how you address a situation where the client is clearly being unrealistic in their expectations. IFAs are, after all, providing financial advice, not financial alchemy.
With markets regularly moving by 2 per cent or more in a single day, is it time to seriously question the extent to which triennial reviews or even annual ones are satisfactory mechanisms for monitoring client portfolios. The cumulative effect of just a few days’ market movements in recent months could clearly have a devastating effect on portfolios. In the accumulation phase, there can be an argument that time will rectify any damage but when it comes to drawdown, the impact can clearly be dramatic.
Personally, I believe current market conditions represent both an enormous challenge but equally an equivalent opportunity to the drawdown market. Surely the challenge must be how can we put in place mechanisms for advisers to conduct far more proactive analysis of customer portfolios, articulate to the consumer the potential impact of a few days’ cumulative losses and identify the trigger points which should initiate ad hoc reviews. At the same time, of course, advisers are faced with the challenge of increasing pressure on their own margins through the transition to adviser charging.
Trying to achieve such a service manually will be bordering on impossible and is almost certainly uneconomic either for the adviser or for the client. Advisers need to have in place detailed systems which can enable them to monitor the performance of client portfolios, perhaps even on a daily basis. There can only be one economic way to achieve this and that must be technology-based.
It is increasingly becoming recognised that designing any regulated product or service varies and there is a need to factor in the impact of retrospection. However much it may seem unreasonable, it is now almost inevitable that financial decisions taken now will be judged in the future with the benefit of hindsight. The science of behavioural finance is increasingly teaching us new lessons about the way in which consumers reach financial decisions. Frequently, logic simply does not apply.
It is my understanding that there is now increasing evidence that, contrary to general expectations, we have become more conservative as we grow older. When it comes to financial decisions, consumers increasingly become more optimistic, perhaps suggesting an unwillingness or indeed an inability to cope with answers they do not want to hear. This must present a major challenge to advisers. After all, it is the consumers’ money to invest as they wish. However, how can the IFA be protected from being blamed for consumers’ own unrealistic expectations?
If the above is the case, it is hard not to anticipate an increasing number of complaints against advisers in the years ahead as overly optimistic consumers take poor decisions based on a desire for income now without recognising the impact this might have on their future financial position. In designing the systems to support the advice process, there must be an increasing need to put in place robust systems to fully record the extent to which advisers have fully demonstrated the potential downside of any scenario. I believe this calls for new levels of partnership between advisers and drawdown providers.
For all but the biggest firms, the technology needed to fully protect the adviser from the unrealistic expectations of consumers will be beyond their affordability. We need therefore to look at new ways in which the services to support the consumer can become an integral part of the product proposition delivered by the manufacturer but serviced in partnership with the adviser.
Understandably, over the last three years, our industry has become increasingly preoccupied with addressing the fundamental changes that will take place in January 2013. While their importance cannot be understated, I believe it is equally time to start looking beyond this date and consider services we will need two and three years hence in order to continue to thrive in the new environment.
The results of our assessment of the drawdown community suggest that while many providers are making a good and, in some cases, excellent job of meeting the immediate requirements, we are seeing little evidence of the type of innovative thinking that will be necessary in the post-RDR world.
For those who can be truly creative, the opportunities will be enormous. Finding the right way for technology to enable this will be a key determinant of success over the next three to five years.