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