Partner Content by Royal London

Advising lower risk clients

Ryan Medlock, Senior Investment Development Manager at Royal London, considers how to help lower risk clients navigate volatile markets.

The recent UK Government Bond crisis has resulted in some quite significant drops in pension valuations against a highly volatile and inflationary backdrop. What makes this latest market shock unusual is that investments deemed to be lower risk have been hit the hardest due to their higher bond allocation.

This has tested the theory that bonds are low-risk or more appropriate for clients approaching or in-retirement and created a conundrum where lower risk has become the new higher risk.

Amongst the spiralling cost of living crisis, how can advisers alleviate client concerns and what steps can they take to help deliver better outcomes for risk-averse clients?

Managing client concerns

Engage and educate your clients - One of the primary reasons risk-averse clients are often placed in lower risk strategies is they don’t have the appetite to ‘stomach’ market falls so naturally, this latest crisis has triggered concerns.

In this context, it’s important to engage and educate clients who lack investment expertise or confidence. That doesn’t mean educating clients on how bond yields interact with interest rates, but providing reassurance on how this crisis is due to lower risk investments’ exposure to bonds which have been severely spooked by the measures announced in the Government’s ‘mini-Budget’. This can be very technical, but it’s important to clarify that there are specific reasons for this drop.

There’s no doubt that market volatility is also a significant issue for clients looking to retire shortly. This can be exacerbated if they want to move assets into cash and effectively crystallise their losses, highlighting the real value of ongoing advice in this turbulent environment.

Encourage income flexibility - Drawdown clients taking regular income from their plan will already be feeling the bite of higher inflation and heightened volatility. Drawdown investment strategies tend to have a higher bond allocation relative to accumulation strategies (particularly those at the lower end of the risk spectrum) with the intention of being more resilient in market shocks. The effect of the latest crisis on these solutions would have come as a big surprise for clients in these strategies and can have a detrimental impact on income sustainability.

So how can income sustainability be preserved by lower risk clients? If they can afford to, it’s a sensible move to limit the amount of income being withdrawn. In addition, don’t be afraid to discuss reducing current and expected levels of expenditure with clients, as this can improve income sustainability over the longer-term.

What practical steps can advisers take?

Review your investment solutions and processes – Lower risk multi-asset solutions with a broader range of assets have fared better than basic solutions using an equity and government bond split during this inflationary period. . These aren’t sufficiently diversified to weather inflationary conditions and market shocks.