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Why are advisers put off by guaranteed drawdown?

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Advisers remain split over the benefits of guaranteed drawdown after a report argued many are unfairly dismissing the products as too expensive or complex.

Last week’s report by consultancy The Lang Cat says guaranteed drawdown products – often called unit-linked guarantees which combine drawdown with assured levels of income – faced a perception barrier amongst advisers who may overestimate the products’ costs. The Lang Cat also noted that providers should communicate the advantages of guaranteed drawdown more clearly to advisers.

Speaking to Money Marketing, The Lang Cat director of communications Mark Locke says that providers can overcomplicate guaranteed drawdown when pitching it to advisers.

He says: “There’s a blurring between selling and informing that’s an issue in these products across the piece. It makes things complicated, and the products are complicated enough. Its asking more of the adviser than you should be asking.”

Yellowtail Financial Planning managing director Dennis Hall says though advisers should look at guaranteed drawdown products, a combination of costs and reduced drawdown income often put clients off.

Hall says: “If you are independent you have got to be looking at the whole suite just to see if there’s suitability for that particular incidence and that client.

“But if you ask clients to produce their ideal product, you’ve got high flexibility, lots of income, and a guarantee. You can’t have all three together and the guarantee tends to be the first thing to go. If they really wanted guarantees they would buy an annuity.

“In my mind I have this 1 per cent drag which is the cost of the insurance. When you talk about safe withdrawal rates hovering around 4 per cent, if you stick another 1 per cent on that it’s beginning to look a lot like an annuity.”

However, Susan Hill Financial Planning founder Susan Hill says that guaranteed drawdown products are valuable solutions that many advisers do not have sufficient expertise in.

She says: “I’m not sure IFAs do understand what’s going on. Unless they really work in it, specialise in the area, have all the knowledge, they don’t necessarily know what it all means and the implications. I specialise and I sometimes despair with other advisers who don’t really understand what clients are getting.

“We need to stop looking at one solution, and look at a number so clients get a package. Advisers do need to start looking at this carefully. If you look at providers, they are coming out with different things and get to tweak them.”



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There are 10 comments at the moment, we would love to hear your opinion too.

  1. john joe McGinley 3rd November 2016 at 4:48 pm

    To be fair the providers don’t help with poor marketing that creates a mystic of complexity to justify the charging structure. The concept isn’t that difficult, however when you concentrate on the engine instead of the benefits no wonder people switch off.

    • How many providers of third way annuities have stopped providing them to new clients?
      The Hartford/Hawthorn Life
      Lincoln/SunLife of Canada
      AEGON have moved it across to their awful ARC system
      How many clients who were advised to use these have since been moved away from the provider as they have ceased to innovate and move forward?
      If it is simply a risk premium, why isn’t it an insured product which can be attached and removed on the clients WRAP of choice?
      It is because Third Way products are how Dinosaur life companies try to make their money sticky on their own platform and that is why.

  2. 3% charges per annum for the provider, 0.5% per annum for the adviser (at least) and 4% per annum withdrawals for the punter (“you can withdraw less than this” say the providers – if I don’t want even a measly 4% per annum from my pension then I have no reason to want a guarantee); combined with a gilt-heavy fund which is managed with the objective not of obtaining capital growth for the client, but of restricting volatility and the insurance cost for the provider; means the only thing you are guaranteeing is rapid fund depletion and zero money for the client. Except his guaranteed 4% per annum income. Which is less than he’d have got from an annuity, with the same amount to pass to his family on death (nothing).

    Matthew 25:14.

  3. John Joe, where did you used to work before swanning off to Ireland?

  4. Spot on Paul – Sascha has demonstrated exactly the ignorance of these products shown by many advisers. And because advisers are obsessed with ongoing fees they take 0.5% or more from product. Why?
    These products have worked very well with our clients in both good and bad times and unlike annuities, clients have access to their capital. But nothing is free in life and you have to accept you need to pay for benefits and guarantees and clients should expect their advisers to offer them the choice, packaged in the manner best suited to the client – NOT the adviser.

  5. I do used these products when the client really wants them.

    However, I have mixed feelings as 2008-09 when a lot of these so called guarantees failed has left a very nasty smell. Many guaranteed products pulled out and clients were then left with poor options. Many did not pay and advisers were then blamed for this, based on the regulators insistence that poor due diligence was at fault, when they had also failed to do their job and insure these companies where offering sustainable products.

    The issue for me is if you want certainty purchase an annuity, this is the closest you can get to a guarantee income. If you set an income at a low level then a guarantee should not be required if managed correctly. The client is paying 1% for something they most likely will never need. More to the point if history repeats, should these guarantees be called on, there is a very high probability they will not be able to pay, based on the past events, Equitable Life, Leman, Key Data and so on.

    The adviser charge is optional, the client does not have to pay for any ongoing advice and service. Just like my car I have the choice to service my self, but frankly these days they are far to complicated, need so many different oils and fluids. Just like my car the client has the choice to have me service or not.

    The current products are very complicated, investment funds can and do fall from grace and frankly just like my car, most clients feel safer knowing someone else is responsible.

  6. @ Nameless & Sascha

    Precisely. It is noticeable that it is in the main the less mainstream (or should I say flaky) firms that offer these. If you want a 4% income why on earth didn’t you take an annuity? The excuse that you can access capital is rather lame. If you do that you’ll receive even less income.

    These are just another way to make clients poorer and providers and some advisers, richer.

  7. The insurance premium is the big millstone dragging these products down. In a low-return environment I just don’t see there’s enough headroom for it (especially when market volatility is jacking up the price of the guarantees).
    Provider charges (even though they are not nearly 3%), advice charges, guarantee charges – there’s only so many slices can be had from a small pie.

  8. The guarantee charge is either 0.55% or 0.65% depending on the fund you choose. MetLife have been providing these guarantees for over 40 years….

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