2018 will be another year of change for the advice profession as new regulation and market conditions present fresh challenges, but also opportunities, for IFAs.
The start of 2018 will be heavy with European regulation as Mifid II, Priips and then the General Data Protection Regulation all come into force.
Ensuring compliance will be key as eyes turn to advisers, but also platforms and asset managers for clues as to how they will process the new rules.
Two years on from pension freedoms, experts are calling for platforms to make it easier for clients to access their income, but also warning about the possible implications of default fund changes.
As uncertainty persists in the political and economic landscape, commentators are also placing their bets as to which investment trends will win out for clients.
Money Marketing looks forward to 2018 to see what the advice community can expect and how it can continue to thrive.
Staying ahead of regulation
Former FCA technical specialist Rory Percival urges advisers to work on their client communications concerning “the sheer volume” of regulations surrounding the advice process.
He says: “There is a risk that there are a lot of layers in the advice process. That could go against the client.”
Zurich retail platform strategy head Alistair Wilson urges advisers to ensure they understand how platforms are updating their processes to deal with Mifid II, as well as how the rules will work for their own business.
For instance, Wilson says advisers should note that some platforms are not applying the Mifid rule asking providers to notify clients if their portfolio falls by 10 per cent or more in a quarterly reporting period to pension funds.
Wilson says: “This means that advisers and customers may not be aware if their retirement pot suffers a substantial fall, despite the fact it’s likely to be the largest investment they hold.
“Platforms should go beyond the Mifid II rules and issue alerts for pension portfolios, so that advisers and clients have a clearer overall picture of their investments.”
Experts say retirement income will take centre stage in 2018, with some potential changes around the design of default funds.
Nucleus product technical manager Rachel Vahey says the industry is expecting the work and pensions select committee to issue its report on the pension freedoms in the first few months of the year.
Towards the summer, the FCA should publish its final retirement outcomes review, recommending changes to help the third of individuals who enter drawdown unadvised.
Vahey says: “The FCA may require drawdown pension plans to offer a default fund, although where there is an adviser I believe this shouldn’t apply.”
In January, the FCA looked at how a number of firms were making changes to lifestyle investment strategies and whether these were appropriate for the customers.
Later in the year, it emerged that Standard Life was changing the investment strategy of its default pension fund, affecting more than one million existing customers.
Vahey argues the FCA may choose to apply a charge cap to default funds, which would, in turn, ignite some “intense” discussion over the level of charge as well as the design of the products.
Demand for defined benefit transfers will certainly continue in the new year.
Vahey says: “The FCA’s new advice process for DB transfers should become effective later in the year. With the increased media focus on DB transfers this should help shape the debate, especially as the demand for transfers doesn’t show any signs of abating soon.”
Vahey notes there are other changes to watch out for too.
The lifetime allowance increases to £1,030,000 in April, and a new single financial guidance body replacing the Money Advice Service, The Pensions Advisory Service and Pension Wise will go live at some point after October.
Automatic enrolment contributions will increase by five percentage points, as discussions continue over how this could be extended to the self-employed.
Platforum head of intermediary Miranda Seath says the unstoppable flood of pension assets might see platform net sales hit £100bn next year. As flows increase, Seath suggests platforms should improve the way they service clients in decumulation and, among their improved services, they could start paying income on any date an adviser chooses.
2018: key dates for advisers’ diaries
3 January: Mifid II and Priips come into force
23 February: Insurance Distribution Directive starts
25 May: General Data Protection Regulation begins
First half of 2018: Policy statement following consultation on implementing asset management market study remedies
Work & pensions select committee report on pensions freedom
April: Lifetime allowance increases to £1,030,000 and increase of 5 percentage points in automatic enrolment contributions
Summer: FCA Platform Market Study – interim report
Wilson says: “Pension freedoms transformed the market, giving platforms focused on the at-retirement space opportunities to march ahead. It’s been two years since
the freedoms were introduced and still some platforms can’t do the basics well.
“Given that consumers now typically spend more time on a platform drawing income than growing their wealth, we’re likely to see platforms focus on developing quicker and slicker ways of giving people their money back.”
In the second half of next year, experts expect replatforming projects to continue as well as further consolidation among providers.
Wilson, however, says the continued burden of replatforming could actually make mergers less attractive in 2018, and questions whether scale really is key for survival in the platform industry.
He says: “We are already seeing platforms which have amassed a sizable level of assets struggling to maintain their front- and back-office services and administration processes.
“This situation is unlikely to improve by growing ever greater in scale. In 2018, I expect there to be far more platforms manoeuvring to become a specialist, rather than a so-called super-platform.”
Transact chief executive Ian Taylor says there will probably be more innovation in 2018 than there was in 2017 for platforms.
He says: “Most [platforms] spent most of 2017 writing code for regulators rather than for customers.”
As the regulator prepares for the release of the much-awaited platform market study next year, experts argue providers will still feel pricing pressure, as they did in 2017.
Seath says: “With new entrants Embark and Hubwise snapping at the heels of the big dogs on price, 2018 could be the year that we see a bold pricing move from Aegon or another scale player.”
But Taylor says since price and quality are now more closely related there will be other distinguishing factors to consider next year other than pricing, including over outdated technology.
He says: “The world is gradually splitting into two sorts of platforms. There are platforms making money which can afford to share some of that profit with their clients and there are platforms not making money which by definition do not have the ability to share profits with clients. The distinction between the two may become more marked.
“The reason platforms are successful is because they are new-world admin and the reason they are taking money from everywhere else is because everywhere else is old-world admin. You will see much more movement from old-world admin to new-world admin. That was one of the things that gave platforms such a good year in 2017.
“Anything that is on old-world administration will inevitably end up on a new-world administration basis and most people realise that is what is driving the success of platforms.”
Taylor says some platforms will also have some “awkward” questions to answer on vertical integration as the FCA continues to survey providers.
He says: “The focus will be on some conflicts of interest that may not be all that easy to explain away.”
Experts argue riskier assets could continue their successful 2017, but say political uncertainties will continue to keep investors on the alert.
Old Mutual Global Investors chief executive Richard Buxton has an optimistic outlook for 2018, building on the improvement in the growth in Europe this year.
He says growth globally is “moving forward” and the progress made in 2017 will continue in 2018 despite geopolitical uncertainties such as Brexit.
As a result, Buxton will continue to have sterling as a long-term bet and buy into a lot of domestic and international stocks.
However, he recognises the uncertainties that lie within the UK Government for 2018, even outside the ongoing process of leaving the EU.
He says: “In the UK the policy disaster of 2017 was Theresa May to call an election and lose it. But markets are not pricing in the probability of a Corbyn potential to come to power.
“Capitalism is not working for the under-40s. The big reveal of the election is a massive demographic divide. The Government is sleepwalking into an election disaster.”
Buxton also urges the Government to work on a “radical policy” to address the lack of housing supply. He says: “The Government should be embarking on a massive rebuilding.”
Investec UK Equity Income fund manager Blake Hutchins says Brexit uncertainties will continue to weigh on investment growth in the UK and doesn’t rule out the risk of a political crisis in 2018.
He says: “Brexit is clearly at the forefront of people’s minds. The political outlook is uncertain at best with the risk of a crisis in 2018, as the realities of any Brexit deal are revealed.
“A fragile minority Government with a cabinet that is split on the preferred outcome for Brexit could prove to be problematic.”
He encourages active managers to keep “courage” in their decisions next year though.
He says: “The ambiguity created by Brexit, coupled with the already indeterminate economic and market environments, will certainly impact UK investors and fund managers’ decisions for the foreseeable future. We believe that this environment could create plentiful opportunities for bottom-up stockpickers in 2018 but selectivity will be a key investment ‘trend’ for the year ahead.
“It will also be important for fund managers and investors to remain disciplined, think long-term, look beyond the volatility and have courage in their investment philosophy in 2018.”
Seven Investment Management fund manager Ben Kumar says if global growth fails to move in sync markets may view political rumblings in “a less calm manner”.
But if markets continue to grow apace, the risks of higher interest rates would start to weigh more heavily on bond markets.
He says: “We are quite optimistic that growth will stay robust, but see no need to squeeze every last drop of return out of a strongly rallying market.
“We prefer to lag in a strong bull market and keep looking to protect capital on the downside for both bonds and equities.”