The at retirement market is now a fully fledged market in its own right but the IFA community is not yet treating it at such. This is not just the view of Barry O’Dwyer, deputy chief executive of Prudential UK & Europe, it is also one of the key findings of Aifa’s financial planning through retirement benchmarking study, published last month.
The report, based on research with advisers and consumers, marks IFAs 10 out of 10 for the at retirement advice they give but considerably less than that for the way they present their services.
It also finds that, apart from a very few specialist firms, most advisers apply a similar process for at retirement clients as they would for other investment clients, with advice tending to be focused around the retirement event itself rather than 10 or 15 years into retirement.
For O’Dwyer, the fact that few firms have devel-oped a specialist proposition means that advisers are missing a trick.
He says: “IFAs should be developing their propositions to meet the at retirement market specifically. Lots develop a wealth proposition but they then try and apply that to the at retirement market. Obviously, the advice that is given to 65-year-olds is different to that given to 50-year-olds but the way it is marketed as a proposition is not differentiated.”
His view chimes with the Aifa report, supported by Prudential, which paints a positive picture of accessibility to advice at retirement, with those consumers of all income groups and fund sizes that ask for it gett-ing it and getting enhanced incomes as a result. Only 15 per cent of IFAs said they would turn away an individual with a pension pot below £25,000, the research found.
But when it comes to marketing those at and approaching retirement as a separate client segment, advice firms are falling short.
O’Dwyer says he does not want to tell advisers how to run their businesses but points to big client opportunities among the many smaller firms that go to make up the £11bn-a-year annuity market.
Advisers may respond that the cost of acquiring clients is high and the once-and-done nature of annuity business means the mass market at retirement sector is not as attractive as other areas.
O’Dwyer accepts providers have a part to play in changing that and predicts the ongoing regulatory changes to the at retirement space will lead to the development of more propositions that give IFAs an ongoing role and an opportunity for recurring income.
He also foresees demographics precipitating a sea-change in the significance of at retirement, offering forward thinking businesses a strategic opportunity.
“It may be logical that advisers are not targeting this area just yet because the bulk of the wealth is elsewhere. But the first UK baby boomers are now in their 60s and the advice community will change radically from accumulation to decumulation over the next 10 years. Some IFAs will be able to stand out from the crowd by claiming their proposition for the retirement market now.”
Setting up a separate at retirement proposition in the way O’Dwyer describes will be a considerable undertaking for a firm and could mean bespoke branding marketing material and even a different type of employee.
He suggests firms taking such a step might want to mirror Prudential’s own policy of employing older staff to deal with older clients in its now defunct equityrelease business. “We employed older, more mature advisers in our equity release business and they operated better in this area.”
But with access to advice set to be cut by the retail distribution review, how does O’Dwyer think advisers will target this growing market?
In a nutshell, he is predicting an identical debate over the value of the independence tag as in other sectors, with the conclusion that in the at retirement space restricted advice models will ultimately end up taking root.
“Beyond the at retirement market, the restricted advice option will be more attractive post-2012. This is because the demands to maintain the independence badge are so expensive. A lot will depend on whether advisers need the independent tag to attract customers. At present, advisers cherish the independent tag because their customers cherish it. If their custo-mers cherish it less when they are having to pay a cheque for it, they may move towards the restricted advice model.” O’Dwyer sees little advantage in restricted offerings for conventional annuities, as the top six providers are already virtually the whole market. “But for drawdown or asset-backed annuities, it might make more sense to run a restricted panel,” he says.
So, who would benefit from such a set-up? “It would be the advisers choice between whether it is a stronger message to say ’I have scoured the market’ or to say ’I can get you a better price because I am tied to this provider’. So far, people have voted with their feet and gone for the independent route but that may change.
“Bigger IFAs can get more commission than smaller advisers today and it will be interesting to see whether, post-RDR, bigger advisers are able to reflect that in terms of improved terms or a higher fee.”
What is clear from Aifa’s research paper is the demand for at retirement advice reflected in the low level of understanding of key issues by the target group.
The research shows that retirees underestimate their life expectancy by five years, which is 25 per cent of their retirement.
“They think that if they have got 15 years to go, they need to divide what they have by 15 to give them their income. But actually that means they have a 50 per cent chance of living for 15 years and may live longer than that.”
If you have made it to 65 without talking to an adviser, you are going to be reticent about talking about your health issues
So far, people have bought annuities because they have to. In future, while financial necessity will mean most will still have no alternative, O’Dwyer predicts the age 75 changes will force the industry to do more to promote understanding of the benefits of mortality cross-subsidy.
“People think if I die, the insurance company takes my funds rather than if I die the money goes to pay out to other people who live longer than me. The industry will need to come up with new ways to communicate this.”
The removal of the age 75 watershed will also lead to longer client/adviser relationships and O’Dwyer is predicting more providers will offer asset-backed annuities such as the one his company offers.
But he is at odds with other industry figures who predict a growth in temporary or fixed-term annu-ities and says Prudential will not be launching one any time soon.
“We have looked at temporary annuities but we cannot convince ourselves that anyone will be better off taking such a product. You are taking a bet on longterm yields in five years time. But in return you have to pay commission and the other expenses that come with it and if the long bond yield has not moved in five years time you have wasted your money. Once you work through the numbers, it is difficult to see how you are better off.”
Asset-backed annuities such as Pru’s with-profits Income Choice offering, on the other hand, will become more common, says O’Dwyer, because offering them ties up less of providers’ capital, particularly in light of Solvency II.
Other key areas in the at retirement space identified by the report as in need of more attention from advisers are health, long-term care and the disparity between retirees pension funds and their hous-ing wealth.
The Aifa study identified a reluctance among older people coming to talk to advisers for the first time at retirement to discuss health issues. While most advisers interviewed had discussed health issues with their clients, some seem to be less comfortable in doing so or in discussing family health issues. Even though most advisers said they discuss health matters, only just under half of advised clients recalled these discussions.
O’Dwyer suggests this means IFAs maybe have to be a little more forceful in the way they broach the subject to get the point across.
“If you have made it to 65 years old without talking to an adviser, then you are going to be reticent about talking about your health issues.
Maybe advisers need to be more blunt on the issue.”
IFAs may consider O’Dwyer’s own suggestions that they change their business models as blunt but with the exponential growth of DC pots and regulatory changes in the pipeline, the market is certainly not going to stand still.
’We have looked at temporary annuities but we cannot convince ourselves that anyone will be better off taking such a product’
Key findings of Aifa study
- Defining and implementing a specific at retirement proposition will help advisers in engaging with existing and new clientsn
- Client outcomes will be improved through greater awareness of the Omon
- Raising consumer awareness of increased longevity will help them in planning for their full retirementn
- The increasingly important role of part-time work needs to be factored into the entire retirement advice processn
- Product innovation will increase the scope for advisers to develop tailored solutionsn
- More tools are needed to support advisers
The at retirement advice process is ’fit for purpose’
- Independent financial advice at retirement is currently available to the vast majority of consumers who seek it
- While at retirement business is important to IFAs, few firms have developed a specific at retirement proposition
- Consumer knowledge of options at retirement is often very low
- Consumers are resistant to discussing health with advisers when seeking advice at retirement
- Those already in retirement appear relatively comfortable but the future for the next generation of retirees is less certain
- The market has a limited supply of alternatives to conventional at retirement products