Pensions post-RDR: Rising to the challenge
One effect of the transition to RDR is that clients are now helpfully described in terms of segments, and it would appear that the most popular segment is ‘mass affluent’ which is also sometimes called ‘middle Britain’.
According to the Guardian, which also happens to be my favourite Saturday read, a survey by Experian identified middle Britain as 13.1m Ford Focus driving, Tesco shoppers whose epicentre is Slough. A target market if ever I saw one.
But whichever term you prefer to use, the main thing is that the most popular segment is not high net worth. And post-RDR, providing a profitable and consistent pensions advice service to this segment could be challenging.
A White Paper released last year by Finance & Technology Research Centre Limited, titled Pensions: Delivering Value to Middle Britain, looked at how advisers could profitably deliver advice to this segment. It highlighted that “the current cost of providing ongoing client servicing to clients with pensions less than £100,000 to £150,000 is uneconomic for advisers” and suggested that, post-RDR, only a quarter of existing clients will be able to afford a traditional full advice service.
Part of the issue is that advising on pensions is complicated. It involves pension switching templates, RU64 guidelines, suitability - as well as a number of other factors. Documenting detailed factfinds, meeting regulatory requirements and writing suitability reports all take up valuable time, and much of this work goes unnoticed by the client. Then once the pension is up and running there needs to be a review process to ensure that the investment advice provided remains appropriate for the clients’ circumstances.
Delivering a proper investment review process is not cheap. The level of investment research, management and governance required places huge demands upon adviser firms’ resources. Access to stochastic modelling data, preparing fund research reports (all of which will require to be updated regularly) costs a lot of money. Interpreting all that data - and turning it into a format for discussion at regular meetings with professional industry experts - requires time, skill and experience. Making decisions in the best interests of pension clients (and having the systems to action these decisions for everyone invested, not just new clients) requires sophisticated computer systems, and skilled people to run them.
For many advisers, the cost of delivering an ongoing investment review process for many of their clients will simply be unprofitable.
Some commentators believe that one solution to this dilemma is to find a way to elegantly disengage from the ‘mass affluent’ segment of the market, and to concentrate instead on the ‘high net worth’ segment that can afford a full advice service.