If there's one certainty in life, it's that nothing stays the same for long. That's definitely been the case for the adviser community. The pensions freedoms join a long list of industry upheavals to which advisers have had to adjust.
Here we consider how clients and their needs are evolving. We also look at some of the newer challenges that advisers face, particularly around pensions transfers, and how outsourcing to a discretionary fund manager (DFM) could help.
Recognise your clients?
Over the years, the adviser community has shown great dexterity in adapting to the shifting regulatory landscape. In that time, the types of clients coming through the doors for advice have also changed.
Previously perceived to be the domain of mature gentlemen with 'old money', wealth management clients are now younger and more ethnically and gender-diverse. And it's not just about inherited wealth either; advisers will likely assist entrepreneurs, business professionals and self-made success stories who have joined the growing ranks of the mass affluent. What's more, their retirement plans will look very different from previous generations.
Turn up the volume
While the type of client has changed, demand for advice has also grown significantly, and is likely to continue to do so. There are more people in the UK than ever before and around nine million of them will be moving into retirement in the next decade. These 'baby boomers' have likely enjoyed final salary pension schemes, owned property, benefited from inheritances and are living longer than any generation before them. They also bring over £700 billion of assets into the 'at retirement' market.
For advisers, that's more clients, with greater wealth who are, as a result of the pensions freedoms, looking for increasingly complex advice. Thankfully, however, clients are fundamentally still looking for the same three things: to grow, utilise or preserve their wealth, albeit within a dramatically transformed regulatory landscape.
Improving outcomes through powerful partnerships
Outsourcing investment management can also help provide better outcomes for clients - advisers and DFMs working closely together, each focusing on their area of expertise, but with the client at the centre of that arrangement.
Most advisers will likely oversee their clients' holistic financial planning and tax arrangements, as well as their risk profiling, and will select the investment strategies. The DFM, meanwhile, can expertly manage the portfolios in line with their clients' financial objectives and risk tolerance, selecting the investments and rebalancing as appropriate to avoid portfolio drift.
DB or not DB? That is the question
And so to the regulatory backdrop. Advisers are likely dealing with an increase in the number of clients interested in transferring out of their defined benefit (DB) pension to a defined contribution (DC) scheme, in order to unlock the full pensions freedoms.
The reforms implemented in 2015 require any DB pension scheme member who wishes to transfer to a DC plan, and has benefits valued at more than £30,000, to now consult a financial adviser. This puts the adviser in a privileged position, but one that comes with greater responsibility.
For many, the decision to transfer from a DB scheme and decumulate through a DC plan may well be one of the biggest financial decisions of their lives. The generation now in or approaching retirement have likely accumulated significant benefits within DB pension schemes. Assuming they are advised to move into decumulation through a DC plan, the amount transferred could be the largest financial asset over which they have control. This means big decisions with serious consequences - with the adviser at the forefront.
The trouble with transfers
Clients have myriad retirement needs; sustainable income, access to additional income, death benefits, flexibility and control. A DB scheme provides sustainability but none of the other requirements, whereas a DC scheme addresses all the other priorities but sustainability is a significant risk. This is the pension conundrum and advisers have every right to feel apprehensive around the issue.
The 'right' pension solution will be different for every single client and will require thorough exploration. Some advisers may also fear that their advice could come back to haunt them if their client runs out of money in their retirement and is looking to apportion blame. We must also consider the 'insistent client', who, despite an adviser's considered advice to stay with their DB scheme, is resolute in their decision to transfer. There is ambiguity around who is protected in this scenario.
Advisers have a responsibility to make sure that clients understand their current pension benefits and have fully considered all their options. Equally, the outcome of those discussions should be properly documented so that both parties are safeguarded.
Beyond that, the risks don't stop. If a client moves into decumulation, advisers need to grapple with the ongoing investment challenges that brings, where volatility and sequencing of investment returns are key to sustaining an income, and perhaps being able to leave a legacy.
Relieving some pressure
In the new retirement landscape, it's clear that clients are likely to need multiple investment strategies to meet differing financial goals, levels of priority and timescales throughout their retirement – a journey that could last 40 years plus.
Using the skills of a DFM could take some of the strain for advisers – allowing time to refocus on client relationships while investment challenges are outsourced to experts.
Finding a DFM that is experienced in investing for accumulation and decumulation can help provide a smoother retirement journey for clients. Equally, a DFM that offers a range of dynamic and flexible investment solutions means advisers have a greater chance of helping meet their clients' more varied retirement goals.
The value of an investment is not guaranteed and can go down as well as up. It may be worth less than the client invested. Past performance is not a guide to the future.
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