View more on these topics

John Higginbottom: Is retirement advice ready for a market dip?

With markets generally positive since they arrived, have pension freedoms really been tested yet?

With the advent of pension freedoms, advisers are increasingly looking for a safe harbour that provides some guarantees of their clients’ income, while retaining a lump sum for their heirs. But trying to manage a portfolio that can achieve this is complex and difficult.

With this in mind, it is no surprise that a survey we conducted in conjunction with Money Marketing earlier this year found many advisers want greater product innovation. This industry debate is growing but where does that leave advisers in the meantime?

Of course, solutions already exist in the shape of products such as with-profits and index-linked annuities, which provide a level of income guarantee while benefiting from market returns. But one of the problems with these products is the word “annuity” and the fact it does not give the level of death benefits many people are looking for.

Then there is drawdown. You could argue that drawdown as a concept is relatively straightforward. Funds can go up or down, you can take out as much or as little as you want and the more you take, the less you will have left.

The risks are also clear, hence the demand from advisers for a middle ground solution such as a cap on potential losses which minimises the downside for clients. Many people want guarantees but they also want the flexibility to change their mind if investment conditions move in a direction where that is no longer favourable to them.

The great test

But all this comes at a time when investment markets are becoming increasingly volatile. This creates knock-on issues for all concerned, particularly if conditions worsen. It is a quandary for advisers, providers and clients alike.

Indeed, it could be argued that pension freedoms have not really been tested yet. Markets have been generally positive since the new regime arrived and this is likely to have encouraged more people into drawdown.

So, what can you do to advise safely in this area? It goes back to the key advice fundamentals of having a fully informed client. Are the client’s objectives realistic and appropriate? Do you know what they are and have they been documented correctly? Have you tested the client’s emotional response to different market scenarios? What is their capacity for dealing with these potential downturns?

Of course, along with capacity for risk is the client’s attitude to risk, which can also change over time. Their needs become more complex in a more risky and volatile market.

Time to shine

But despite the challenges, there are also significant opportunities for the advice profession. At a time when advisers are coming under increasing pressure to justify their ongoing fees, this is an area that can answer such criticism.

In helping clients with their later life planning, advisers will increasingly need to design tailored solutions for each, including cashflow modelling that should also factor in certain life events, such as home improvements, holidays or inheritance that will have financial implications. This will also require the adviser’s professionalism and skill given the need for frank conversations around longevity and the desire many people have to pass down assets.

The constant fear of depleted funds all adds up to an emotional journey for clients through later life, which will need to be carefully managed. Of course, an appropriate allocation model will also need to be devised and advisers’ added value continues through the ongoing servicing and monitoring of both that and the client relationship.

So, while the challenges and complexities are there for all to see, so too are the huge opportunities for advisers.

It remains to be seen what new product innovations might emerge but, in the meantime, advisers have a range of solutions at their disposal.

John Higginbottom is head of group compliance consultancy at Bankhall 

Recommended

The platform puzzle: Are in-house funds and models a conflict?

Platforms have brushed aside concerns that running their own funds and model portfolios could lead to conflicts of interest, saying they have the safeguards in place to prevent such issues arising. As submissions to the FCA’s probe into the market have now closed, Money Marketing asks if more attention should have been turned to flows […]

FCA asks payday lenders to review compensation handling

The FCA has written to payday lenders and urged them to review their lending activity to see if their creditworthiness assessments are compliant. In a letter addressed to chief executives, it sets out how the watchdog expects payday lenders to handle issues linked to the increase of complaints about unaffordable lending. If deficiencies are found […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com