More and more IFAs are appreciating the advantages of specialisation. As Cat-standard char ges and stakeholder-type structures cascade into all product areas, existing as a general practitioner IFA becomes inc reasingly difficult.
One clear area of specialisation is point-of-retirement planning, where clients with maturing pensions receive advice on how to handle one of the great financial transitions of life.
Point-of-retirement planning is a true specialisation, with many areas of financial planning specific to that stage of life. The advantages of this niche area can be summarised as follows:
It is seen as an added-value service where the advice is as important as the product.
The service is perceived to be valuable and worthy of fee-based advice.
Large capital sums are normally available.
Clients need to act and dec ide on a maturity route for their pension fund.
However, the very points that make this area attractive also create entry barriers. These can be summarised as:
A high level of specialised knowledge is required.
Large resources will be req uired if proper advice is to be given across a range of areas.
Many of the products offer low commission and fees may have to be charged.
There will be a high on-going servicing requirements from clients with plenty of time on their hands.
One of the primary requirements of the point-of-retirement client is advice on annuity purchase. This is an area which is becoming ever more complex and an in-depth ana lysis is essential.
Annuity purchase was once as simple as selecting the best guaranteed rate for an open-market option. This task can now be done speedily and accurately online but it is only the start of the process. The crash in gilt rates has certainly acted as a catalyst for annuity product development. The range of choices facing a client is bec oming bewilderingly large and takes them firmly into the realms of mediumand high-risk options.
New annuities entering the market are likely to open the full investment spectrum to annuitants with all the dangers this involves.
All in all, this has made annuity selection an extrem ely sophisticated and specia lised area. An adviser must first find the best guaranteed rates, see if any form of imp aired or lifestyle rate would be available, then compare and contrast these with a range of new investment-linked plans and finally prepare a fully compliant report for the client.
This process is likely to take a number of hours and require a good deal of diligence – all for a product that may pay as little as 1 per cent commission.
Given the above, it is somewhat surprising that some firms still offer an execution-only service – a hangover from the days of the take-it-or leave-it guaranteed annuity. Today, the selection is far more complex and the need for advice overwhelming.
This market is attractive but probably only to those with the resources to carry out the analysis in bulk. It is a fact of life that one will lose money on arranging the smal ler cases but clients have an absolute need for the service and take-up figures are high.
Income drawdown and phased retirement
One cannot enter the point-of-retirement arena without considering income drawdown and its half-brother phased retirement – at least, not if one is to deal with funds above £200,000 in value, which is where these products belong.
For a plan that according to the PIA guidance notes is “an inherently high-risk route”, a disturbing number of drawdown plans have been sold to those with smaller funds.
Few readers will need to be told that income drawdown is a specialist area. Indeed, a number of trade bodies have called for advice in this field to be restricted to qualified individuals and new exams are now being introduced.
Drawdown is an excellent area for those wishing to enter the high-net-worth market. It provides for true added-value advice to be given in an area that is far too complex for even the most intelligent cli ent to act without guidance.
However, it should not be used as a method of compensating for the low commission paid on annuities. Drawdown cases written on initial commission terms of 5 or 6 per cent is unj ustifiable (and probably non-workable) and really should be stamped out.
This is probably an area that should always be app roached on a fee-paying basis with trail commission to take account of the very real on-going servicing requirements. The legislation calls for a full triennial recalculation but an annual investment review is also ess ential. My firm has a separate team of consultants tasked specifically with running ann ual drawdown reviews.
So drawdown is, and should be, the realm of the sophisticated and knowledgeable IFA, for whom it can be a tremendous market.
Inheritance tax planning
Another area with enormous added-value credentials is that of inheritance tax planning. If the drawdown arena is complex, then the same is true of the IHT market but in spades.
IHT planning goes far beyond simply writing bonds and protection policies in trust and is an arena in which a little knowledge is definitely a dangerous thing.
It speaks volumes that the product provider companies in the IHT market generally have technical departments to support these sales, staffed by legal executives and trained solicitors. The IFAs that operate in this market rarely do.
With the rise of the “new wealthy”, IHT planning is lik ely to bec ome a far more imp ortant mar ket and one that could be ideal for sophisticated IFAs.
Standards of advice in this area are currently too low and would benefit from the same standards of professionalism generally offered in corporate pension planning. Given these parameters, the market looks attractive and under-exploited.