29 May 2015

The recent pension freedoms are part of a fundamental shift in the type of advice that advisers are being called upon to provide. More responsibility is being placed on individuals for the long-term management of their finances, be that for retirement, for long-term care or for the education of their children. Given that many investors still need help to navigate this environment, advisers need to ensure they are in the right position to provide the right type of advice in this new environment. They also need to demonstrate that advice, in itself, is an investment worth making.

Bad behaviour

It is clear that people are not always naturally good stewards of their finances. Swayed by behavioural biases, many neglect inflation, or invest inappropriately for their natural risk tolerance. They may leave too much in cash, or leave themselves over-exposed to one or two companies, or underestimate how long they are going to live. The freedom and flexibility of the new retirement options are welcome, but they raise the capacity for people to make errors in planning their finances.

Access denied

Advice has a vital role to play both in helping clients save, and helping them avoid mistakes: the latest BlackRock Investor Pulse survey suggests that people with an adviser save more than those without an adviser, but perhaps more importantly they also invest more than double (20% versus 8% of income).

But at the same time, access to advice has diminished. The Retail Distribution Review has undoubtedly raised the level of client wealth at which it is feasible to provide advice. The Government has committed to providing some free advice as part of the introduction of the pension freedoms, but for many clients a one-off session is unlikely to meet their ongoing advice needs.

Pot luck

Annuities will still have a vital role to play in many retirement portfolios, but the remainder of the pot may need greater attention. Relatively few retirees are likely to be equipped to manage the long-term asset allocation in a drawdown portfolio. Increasing longevity means that people can expect to spend up to 24 years in retirement. This argues for a higher weighting in risk assets, at least in the early part of their retirement, but are retirees in a position to decide when it is time to move back into ‘safer’ assets, particularly at the moment when many of those assets appear expensive relative to history?

Pensions are also likely to be used more frequently in inheritance tax planning, which will also bring investment considerations. Equally, the Government’s one-off advice is likely only to cover pensions, which ignores the role that, say, ISAs might have to play in retirement planning, or how people should prepare themselves for care home fees.

A life-changing opportunity

This is a great opportunity for financial advisers with the right range of options to ensure that people do not make life-changing mistakes with their finances. That advice must be fit for purpose and this issue is perhaps particularly loaded for retirement income: retirement wealth is near-impossible to re-earn. If retirement income is managed poorly, poverty and/or state dependence become real possibilities. Equally, advisers have an opportunity to decide the type of business in which they want to specialise. As the market beds down, they have time to figure out their strategy, the type of clients they want and their pricing.

The phone will probably already be ringing with people wanting answers on their pension options, but some forethought can help ensure advisers make the most of this historic opportunity.

CARS ref: RSM-0956
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 22 May 2015 and may change as subsequent conditions vary.

Advice has a vital role to play both in helping clients save, and helping them avoid mistakes.