INVESTMENTS & PENSIONS
So , in the face of a changing environment , it doesn ’ t seem unreasonable for firms to believe that they can continue to focus on a set of clients that fit with the way they want to do business rather than having to adapt . This may mean fewer clients and , presumably , eventually fewer advisers , but it seems that competition for clients is not a near-term driver for firms to adapt their retirement advice propositions . Any suggestion that firms need to change their propositions to help bridge the so called “ advice gap ” is almost certainly wrong-headed . Beyond this though , there are two significant factors that may challenge current approaches to retirement advice – the current economic and market environment and regulation .
NEW REGIME = NEW APPROACHES
The sharp rise in interest rates had a significant impact on many retirement income portfolios . Supposedly lower-risk portfolios suffered losses on fixed income that may not be recovered quickly if at all given the emerging view that rates will stay higher for longer . At the same time , the continued increase in the cost of living is putting upwards pressure on income requirements . Twelve months ago , I sat with a group of advisers who agreed that advised clients were largely immune to the impact of inflation . No doubt they are better able to withstand it than many , but three-quarters of the advisers we surveyed put it as a key concern for clients and over 80 % said they expect this concern to rise in intensity over the next few years .
We see this shift in economics as a strong incentive to re-examine how retirement income portfolios are structured . There are many differences between clients taking income and those saving for retirement and these need to be reflected in the way portfolios are constructed . The ability to deliver the return the client needs to meet their income objectives with consistency and certainty is what matters most . This is likely to mean focusing less on maximising returns and more on striking a balance between risk and reward . Just under a quarter of our respondents expect to change the way they structure their investments for retirement advice clients with a further quarter unsure whether they will or not . Whether changes need to be made or not , advisers will need to consider whether the strategies they are using are well suited to the new environment we find ourselves in .
The increase in interest rates isn ’ t just affecting investment approaches though . Annuities , having been out of favour for most of the past decade , are back under consideration now that rates look more attractive . Nearly two-thirds of advisers surveyed expect their use of lifetime annuities to increase and over a third expect to use temporary annuities more . Incorporating annuities into retirement plans involves more than just adjusting processes . Thought needs to be given to how it impacts other parts of the plan from investment strategy to inheritance planning . Beyond this , keeping clients invested at all is likely to become more challenging with deposit rates now looking more attractive in nominal terms and against a very uncertain market outlook . 44 % of advisers cited the risk of clients moving to cash as a key business challenge . Taken together , these trends are likely to have an adverse impact on ongoing advice revenues and should cause firms to consider their overall advice proposition .
It is our conclusion that , while the strong demand for retirement advice will give firms some scope to maintain their current advice propositions , the shift in the economic environment and regulatory expectations will be overwhelming drivers of change regardless of the target market . The current approach to retirement advice certainly isn ’ t broken . At it ’ s core it continues to deliver significant value for clients both in terms of tangible benefits and the more difficult to measure intangibles such as peace of mind and avoiding mistakes . But a radical overhaul seems inevitable if we are to ensure it continues to stay relevant in the years ahead .
FOOTNOTE :
Research conducted by NMG Consulting for BNY Mellon Investment Management , June-July 2023 . The research comprised an online survey with 202 retirement-focused financial advisers and 64 in-depth interviews with consumers , industry experts and retirement specialists .
For Professional Clients only . Any views and opinions are those of the author otherwise noted . This is not investment research or a research recommendation for regulatory purposes .
For further information visit the BNY Mellon Investment Management website . www . bnymellonim . com . Doc ID : 1611250 . EXP : 30 April 2024
1
Financial Conduct Authority retail intermediary market data 2017-2022
JANUARY 2024 | 21