Charges and service levels for post-retirement clients remain in the spotlight
Experts are urging platforms to up their game in the decumulation space as advisers report continuing frustrations when it comes to servicing drawdown clients.
Advisers have undoubtedly benefited from huge efficiency gains when dealing with clients in accumulation, but some are now questioning whether additional functionality is needed from platforms to deal with the increasingly complex world of post-retirement planning.
Ryanair-style pricing models can soon see the cost of ad hoc planning services add up for decumulation clients, while advisers are reporting a host of other improvements to streamline processes that they would like to see made.
Making drawdown too difficult
Money Marketing understands that the final report in the FCA’s platform market study is due to be published next month. The study has focused on potential inducements to adviser business and exit charges in the platform world to see if competition is working for investors. However, it is unlikely to target reforms that would improve how advisers work with platforms in the decumulation arena.
While the vast majority of fees in accumulation are on a simple percentage of assets basis, platforms frequently charge for additional services once a client enters drawdown. These can include fees for individual transactions, lump sum withdrawals or closing accounts, which can cause friction in the planning process.
Charges for paper statements, for example, could be seen as disadvantageous for older or more vulnerable clients, or those entering a more advanced stage of their life who are reliant on physical records rather than digital ones.
Pre-funding of withdrawals is still not universal, nor consistently applied across those platforms that facilitate it, and it can be difficult for advisers to get a definitive picture of exactly what process each platform in the market follows before they use it.
More crucially to planning for decumulation clients, while the FCA’s study found that average Isa transfer times are around 30 days – in line with HM Revenue & Customs’ recommendations – Sipps can take significantly longer.
While the platform industry has worked to reduce transfer and transaction times, platforms will often only state the maximum time it will take for a transaction, meaning advisers and their clients in drawdown will not know exactly when they will be able to get their hands on funds for their retirement, where the need to facilitate income is paramount and delays can be costly.
Ian Thomas, managing director, Pilot Financial
Automatic selldown is the big issue for me. What normally happens – unless the adviser is incredibly on top of things – is that there will not be enough cash for the selldown so clients will miss their income.
Platforms are not all targeting the same type of advice. It’s important advisers work with their target and which platforms are wanting to do business in that space.
With the annual restatement of suitability, if a client is slipping into drawing down their benefits from accumulation you can’t necessarily assume it’s the same and you should probably be taking that into account.
If you have not drawn down enough, will the client hit the lifetime allowance? What about inheritance tax? When it comes to platform tools for that though, I’m not sure it’s worth spending time building stuff that isn’t what a good quality financial planner would be planning for anyway, and I’m not sure I would want to pay for the facility of that tool set.
Next Wealth managing director Heather Hopkins says that when her consultancy conducted research last year, a quarter of advisers asked to list their favourite platform for accumulation and decumulation respectively picked a different provider for each life stage.
Hopkins says that advisers’ main reasons for picking different favourites were not down to the platform being set up for accumulation as opposed to decumulation necessarily, but planners were more concerned with the platform’s ability to handle the level of complexity that comes with decumulation clients.
Roundtables have continued more recently as issues keep arising and advisers look for further guidance.
“It was pretty straightforward there were shortcomings, it hasn’t moved that much [since],” Hopkins says. “With a withdrawals strategy when you are putting money in it’s easy to do, but taking money out on an ad hoc basis, you have to plan for all of that.”
Hopkins notes that platforms like Transact and Standard Life Wrap are among the most popular for decumulation clients, despite being seen as “premium” in terms of costs.
She says: “People often talk about how price-sensitive retirees are, but the risk of getting it wrong can’t be taken for them. Missing an income payment really messes things up. Advisers are willing to pay more for technical support and to ensure the servicing is going to be there.”
These issues are brought into starker relief by the FCA’s new product governance rules, or Prod, which came into force alongside Mifid II in January, mandating that advisers assess whether the products they recommend to clients are appropriate for the specific target market the client falls in to. This raises an argument that advisers have an increased duty to look at whether their platform, which might be well suited for a client making investments and building a pot, remains appropriate once they have entered a new life stage and have different needs as someone looking to wind their savings down.
Susan Hill Financial Planning director Susan Hill says: “I don’t think we are taking as much notice of Prod as we should be.
“With the relevance of the product to our target market, something in accumulation might be the wrong product in decumulation because the service standards or the costs have changed.”
Platforms stepping up to the plate
The good news is that a number of platform providers have acknowledged the importance of their role in decumulation planning and the need to make advisers’ lives easier when dealing with post-retirement clients.
Parmenion, for example, teamed up with consultancy Hymans Robertson last year to develop a tool for advisers to help measure the success of a client’s drawdown strategy.
Hopkins notes that model portfolios are often not tax-efficient in decumulation because income tends to rebalance into the portfolio automatically, but the likes of Seven Investment Management has looked at how to address these issues.
Hill praises the new Alliance Trust Savings platform, which she says did not used to identify crystallised versus uncrystallised lump sum payments, and also is positive about its low fee for working with cash deposits held off the platform.
Zurich is another platform that is looking to create a unique selling point for the business over making decumulation as straightforward as possible.
Zurich’s head of retail platform strategy Alistair Wilson says: “Moving from accumulation to decumulation, you might need to reset the services you’re going to offer, and it’s absolutely crucial to ensure your platform can deliver for you and your client.
“Particularly with Prod, advisers should review their platform choices for clients looking for income in retirement.
Susan Hill, director, Susan Hill Financial Planning
Being cynical, the reason platforms are worse at decumulation is because its money coming off the platform. We’ve had trouble with uncrystallised fund pension lump sums, where platforms can’t always identify crystallised versus uncrystallised, and it doesn’t integrate with our cashflow planning systems.
A major part of the retirement scene is that obviously you are accruing money, but the reason is because you are going to spend it. Platforms aren’t paying attention and I would flag that up as a cause for concern.
It’s not just the service element; when you start looking at cost, you may have a low percentage or flat fee, but then you charge for this and that. If you are in drawdown, it’s higher charges, but I don’t understand why because the reporting must be easy when it’s all digital.
“Risk assessment tools might also have been built with accumulation in mind. If clients are looking to withdraw a lump sum or regular income, it will surely change the risk they are able to take with some of their investments.
“The problem is, when the technology needs to be improved, it’s like changing the engine of a Formula One car while it’s going around the track. It’s tricky and getting it wrong has serious implications for clients, especially if they’re relying on regular income to live on.”
The path forward
So what do advisers really want from their platform when it comes to drawdown service?
There are a number of developments that could look to streamline the process of decumulation; for example, being able to see drawdown across Isa, pension and general insurance account wrappers at the same time.
In a modern life planning business where the client’s journey, and not just their investment performance, is placed front and centre, some have argued that their third-party cashflow modelling tools need to be better integrated into the platform they use to execute the investments on.
Equally, platforms could improve their in-house cashflow modelling tools, and offer more in the way of calculators to help planners understand the tax implications of their post-retirement strategies.
Retirement can be an uncertain period, and most advisers agree a cash buffer is needed.
While you may not be optimising returns by being out of the market, meeting the psychological needs of a drawdown client might require holding back a significant amount of cash.
However, it can be inefficient to do this through the platform and pay its charges just for holding cash, so advisers have discussed ways those fees could be adjusted or platforms could display cash holdings even if they are not held on that platform.
On the product side, Hopkins says that her research pointed to advisers wanting better access to and information on the likes of offshore bonds and equity release with a view to devising the optimal withdrawal strategy for high-net-worth clients.
Any new functionality may come at a price, though, particularly if the platform is charging fixed fees for each element. It may be that the future of retirement platforms remains dominated by percentage-based charging for some time to come.
A recent poll of Money Marketing readers showed that only 15 per cent thought, eventually, the majority of platforms in the market would charge fixed fees.
As Pilot Financial adviser Ian Thomas says: “It’s horses for courses; if you’ve got a client with a large amount of assets, if the transactional fees are low relative to the ad valorem fee that might be the way to go. When we do a pricing comparison, lots of platforms heavily tier their fees above, say, £1m anyway.”
Platforms need more flexibility as clients enter decumulation
Platforms are becoming increasingly aware of the challenges of retirement and ensuring that their propositions are fit for purpose.
Most advisers tell us that greater flexibility in drawing down retirement income is very important. However, platforms with more limited regular withdrawal options say they have not received any significant feedback about this from adviser users.
Most people are accustomed to receiving their salary on a set day of the month that isn’t self-selected and are therefore used to the concept.
Pre-funding withdrawals is something that only a handful of platforms can facilitate, but in most cases, advisers will be managing cash held in their clients’ portfolios in order to have a balance from which to pay out income and charges.
In fact, some platforms require a minimum proportion of cash to be held in a portfolio. The majority of platforms do pre-fund pension tax relief, switches and rebalances which arguably have more impact on a client’s portfolio.
Looking across all platforms, ad hoc withdrawal charges and additional fees for administering a Sipp in drawdown are something of a mixed bag. Advisers should make sure they are aware of all potential charges – not just the headline rates – when conducting due diligence and looking at platform suitability on a client-by-client basis.
Platforms and other providers will have to use technology to become more flexible as more and more clients move into decumulation and present with more and more complex needs.
Andrew Ashwood is senior analyst at Platforum