Tsunami on the way

The next 18 months will see the start of a long-term rise in sea level for managed retirement assets and planning as customers start using pension savings in more active ways. What should industry professionals and customers be doing to prepare for the flood?

There are likely to be three key impacts from this structural shift:

1. Rising demand for retirement planning causing a serious cost-to-serve challenge. With increasingly complex choices on offer, customer confidence in self-directed decision-making is low. This is both an opportunity and a challenge for financial planners, particularly in the mass market and mass affluent sectors where customers will struggle to pay the fees required for traditional service delivery.

2. Growth in income funds and a focus on risk-adjusted returns. As annuities crash there will be an accelerated flow into risk-managed, multi-asset funds and portfolios delivering income. Regular risk profiling of the client and their investments is crucial during retirement. As this market matures, the focus will be on risk-adjusted returns, net of fees.

3. Hybrid structured products offering a ‘third way’. The demand for both flexibility and certainty in retirement income will trigger the emergence of new hybrid product structures. More sophisticated risk-based, cashflow planning using clear, transparent assumptions and engaging outputs will be needed to help advisers and customers make suitable decisions.

Compulsory annuitisation meant that retirement planning used to be a ‘once and done’ activity, if an adviser was involved at all. According to an FCA study, 60 per cent of annuities last year were bought from a customer’s existing pension provider. The FCA concluded that despite industry efforts to encourage people to shop around, there are still significant barriers to doing so, including lack of confidence, not fully understanding the decisions required and simple inertia.

Research confirms that most people are nervous about making retirement choices. It is one of the largest financial decisions a customer will make, so the stakes are high, with little margin for error.

But the cost of advice delivery and servicing poses a challenge. For a mass affluent customer paying £125 per hour for an average of eight hours adviser time and eight hours admin, the minimum realistic fee is £1,300. Many clients say their costs-to-serve are actually several times higher than this. Unfortunately, cost-to-serve does not correlate with case size. Advisers put in the same work on an investment of a few tens of thousands of pounds as one of hundreds of thousands. The average pension pot in the UK at retirement is £36,800; a fee of £1,300 would reduce that pot by 3.5 per cent, a significant amount for a pensioner living on this money. This makes it difficult for an adviser to attract a commercial fee.

For customers with pots of less than £100,000 the cost of traditional face-to-face advice is prohibitive. Could technology be the answer? Buying online usually means lower prices, so customers can potentially be shown that doing their own fact-finding online means lower fees and a faster service. Evidence suggests that financial planning tools on their own however, while they will improve education and understanding, are unlikely to drive decision-making on such complex decisions. At the shallow end of the pool, for relatively simple rate-driven decisions, for example, only 6 per cent of annuity buyers actually consult a comparison website. At the deep end, when the choices are more complex, most will be even less confident. The latest evidence from the US shows that tools and education alone do not make a meaningful impact on investor enrolment and case size.

So what will work? We believe companies offering financial planning will have to work hard to lower their cost-to-serve by:

1. Adopting front office and financial planning technology, reducing re-keying and the cost and risk of the planning process and enabling advisers to implement recommendations speedily on a platform without re-keying. The front office will need to integrate seamlessly into practice management and certified risk management.

2. Using aggregation technology to gather and publish contract enquiry-based valuations on arrangements and portfolios, moving away from paper and radically reducing servicing time.

3. Adopting an omni-channel strategy, providing engaging tools to educate customers on their choices, while accepting that:

a.The offer will have to be sufficiently compelling, with significant time and cost benefits to overcome customer inertia;

b. For more complex decisions, a ‘share my plan’ option will be needed, perhaps with an adviser who can assess the information already entered or with a telephone-based agent who can talk through choices.

Next April’s pension reforms are already generating significant waves ahead of the tidal wave of retirement wealth and opportunities for financial planners and asset managers. But there is much to be done to prepare customers and industry for these changes;

1. Addressing the cost of delivering retirement planning services to customers, particularly utilising omni-channel solutions;

2. Provision of risk-managed, multi-asset funds and portfolios with strong risk-adjusted returns and incomes; and

3. More engaging, risk-based planning tools to help advisers and customers select the most suitable products for the right time in a customer’s retirement.

Ben Goss is chief executive of Distribution Technology