When the Government pushed the door wide open for those aged 55 and over to draw their retirement savings with impunity there was no corresponding initiative to promote affordable independent financial advice.
With literally million of savers now considering options other than annuities, access to alternative retirement income products is widely seen as a positive development. But speaking at a recent Money Marketing roundtable on next generation at-retirement solutions, delegrates warned there is a danger some retirees may make the wrong financial decisions.
The guidance service Pension Wise offers some support for savers considering their retirement options, but it is unregulated and therefore unable to offer anything even close to professional advice.
At the same time, said delegates, the current regulatory environment places such significant cost pressures on advisers that they are often forced to focus on more profitable clients rather than targeting the mass market.
For Personal Finance Society chief executive Keith Richards, this cocktail of factors, coupled with the surge in the number of non-advised entrants to the at-retirement market means the next big financial scandal may be just around the corner.
Richards said: “A misbuying scandal is brewing because people aren’t getting that advice. The Government is wising up to the fact that Pension Wise is just part of the solution. In itself it’s not a great experience if you need help because it just signposts you elsewhere.”
The Financial Advice Market Review which aims to identify and break down barriers to the wider market receiving advice may attempt to bridge the advice gap exacerbated by the Chancellor’s pension freedoms revolution. But industry professionals are unconvinced it can answer all the questions.
Partnership chief executive Steve Groves said: “What worries me is non-advised clients. Two thirds of [at-retirement] products are not advised and all the money going out is at the small pot end. Unless the FAMR delivers, then wealthy clients will be fine and everybody else will be making a right mess of it.”
Of key concern to panel members was the additional financial risks investors take on when they opt for drawdown rather than buying a traditional annuity. Advisers pointed out that in the absence of proper advice there was a chance many individuals would be left with nothing, which would be financially devastating for those involved and create more negativity around the broader retail financial services sector.
Towry head of retirement Andrew James said: “There is so much going on without advice, and because of the lack of understanding many savers will be making huge mistakes. We can talk about sequencing risk but if you mentioned that to someone in non-advised drawdown would they know what you are talking about?”
The inconsistencies in the Government’s application of freedom and choice have clearly created challenges for the advisory community.
Defined benefit schemes cannot give access to cash as of right now and if savers wish to participate they are forced to seek adviser sign-off before they can leave their occupational plan.
Groves described this Government policy as “schizophrenic”, adding: “On the one hand we are saying there is freedom and choice but people are not allowed to leave a DB scheme without regulated advice. We have to decide if we are giving freedom or not.”
While the panel acknowledged advisers were put in a difficult situation when asked to sign off on DB to defined contribution transfers, Eversheds Consulting managing director of regulatory Simon
Collins argued it created an opportunity for advisers to demonstrate their integrity.
Collins said: “The high quality adviser will do the right thing. But we have got to be sure the
entire advice industry behaves in the right way because we only need a small number to do this wrong and the whole industry will be tarnished.”
Avoiding the “wrong types of client” is critical for advisers post freedom and choice, but firms also need to attract the right kinds.
The panel discussed the potential of FAMR developing a “regulation-lite” solution, offering a sliding scale of service that could incur different charges and with different levels of regulatory protection dependent on the saver’s need and the type of advice scenario.
Groves said: “If I go into Currys and buy a fridge I can choose to get a 10-year warranty, or I can go and buy a kettle and decide that warranty is not worth it. If I go to an IFA and what I am doing is very simple, I don’t need a guarantee on that advice and the cost should be massively different to when I am doing something more complex with guaranteed advice.
“There is a huge difference between telling someone what they should do and simply telling them that what they are thinking is not stupid.”
Such a solution would solve the situation where individuals wanting access to their pension cash have to pay for advice they do not want, and that they may ultimately ignore, it was suggested.
Even under today’s regulatory regime, segmenting the client base was seen as another way of extending advice to a wider portion of the population but delegates said this can only work if advisers are able to convince savers that their services are worth paying for.
James said: “The major issue is getting the right investments for the client and giving the right advice. If that is done correctly then it’s worth paying for. If you don’t take advice that could prove a very big cost to you. Unfortunately everyone looks at what they pay and not what value they get.”
Panoramic Wealth managing director Gary Jefferies said: “Pension freedoms have expanded the number of people who want to talk to advisers. These people are often coming to advisers because they are an existing client’s relative or friend, and someone who needs some specific advice at a particular time. They are not IFAs’ traditional clients but pension freedoms mean they are now more likely to need that advice and look to engage with advisers.”
The panel discussed the way in which the advice market is likely to open up following FAMR, and the possibility of more unregulated firms stepping in to fill the advice gap.
Richards called on different types of advisory service to be treated differently by regulators, allowing more flexibility in the market.
Richards said: “Fewer firms are willing to offer regulated advice, so the Government is keen to address those barriers. The FAMR will say advice is advice, but all consumers need to be treated appropriately and if the cost [of accessing] advice is disproportionate that needs to be addressed.”
Alongside proving their worth advisers need to ensure they have the skills in-house to meet the demands of savers in the post freedom and choice world. Advisers tackling the at-retirement market will be expected to understand the myriad nuances of managing a portfolio during the decumulation stage – skills that Collins said are quite different to working in the accumulation phase.
“The challenge to firms overall is having people in the practice who are competent enough to take a more holistic approach,” said Collins. “We are now looking at broader financial planning where people need advice from age 55 for the next 30 or 40 years. That brings with it the challenge of having the right people with the right skills sets and qualifications to guide people through that area, especially now that there are so many options for people.”
In particular, for those clients new to drawdown, there is an education process to ensure investors are aware of the risk of market crashes, taking excessive withdrawals, living longer than expected or a combination of all three.
Richards said: “[Advisers] are going to have to manage consumer expectations. We need to actively manage drawdown, which might mean telling a client to defer a holiday or car purchase because of the impact on their fund. We can demonstrate through cashflow modelling the impact that [withdrawal] will have and clients really value that financial management.”
The freedom and choice regime has created significant advisory opportunities but only for those firms able to overcome the numerous obstacles.
The FAMR should help less wealthy savers access advice, but whether established regulated firms want to open up to this market remains uncertain.
Trusted advisers know their audience and appreciate the value they give to their clients, and there is a danger they may water down their proposition by venturing into uncharted territory.
As providers bring more products to market and advisers gain confidence under the new regime, the advice gap may start to close but there is still a long way to go.