A rethink of retirement advice? Momentum is building for change

In research conducted by FT Longitude for BNY Mellon Investment Management, 90 per cent of financial advisers and planners agree that they expect the way in which they think about retirement solutions to change significantly in the next five years. At the same time, they admit that their industry is slow to adapt, with 88 per cent in agreement that attitudes and approaches to retirement planning need to change more quickly than is currently the case.

The client comes to the fore

The Financial Conduct Authority (FCA) has put in place a set of consumer duty rules, which are a significant driver of change, pushing the industry towards a more client-centric position. “The rules put consumer interests at the heart of all sorts of decisions, whether it's advice or product design,” confirms Richard Parkin, head of retirement at BNY Mellon IM. “Advisers must demonstrate that they have thought through every aspect of their service with the consumer in mind.”

A focus for the FCA's thematic review of retirement income advice is around how the needs of retirement clients differ from those who are still accumulating wealth. Post-retirement, the emphasis of investment should shift from growth-oriented accumulation to ‘decumulation’, or withdrawal from previously accumulated reserves. Decumulation is generally more geared towards income and capital preservation. This implies the need for different portfolio designs but, at present, there is little consistency in how advisers approach this question.

Also even though accumulation and decumulation clients have quite different priorities many financial advisers still use overly standardised portfolios for both. Though the FCA does not mandate the use of different portfolios for these two types of clients - it does call for the right investment solutions to meet their individual needs. Therefore, ensuring retired clients, for example, are invested in funds tailored to their needs is one way to demonstrate regulatory compliance.

At the same time, the concept of retirement is changing and, for many, there is no longer an immediate transition from working full-time to being fully retired. This may be one reason why 88 per cent of the IFAs in our survey agree that it is overly simplistic to think about clear-cut accumulation and decumulation stages, and that a more nuanced approach is required.

As Generation X starts heading into retirement, the nature of this transition will come under greater scrutiny. Their requirements are likely to be more complex because they typically have smaller, more fragmented pension pots and far less reliance on defined-benefit pensions than the preceding generation. This will undoubtedly lead to a greater number of individuals that require financial advice, but advisers are likely to have to work with smaller average pension pots, which could mean greater effort for lower fees.

Technology offers a new framework for advice

This is where technology is likely to offer a helping hand by automating and streamlining many processes. “The advisory market will become far more sophisticated, automated and tech-driven,” affirms Christian Markwick, Head of Adviser Support at The Verve Group. “The number of clients that the next generation of advisers can service will be vastly higher but, at the same time, we can introduce greater consistency, rather than having different advisers, even within the same firm, advocating different approaches.

Providers are already seeking to make tasks such as forecasting cashflow and constructing portfolios more joined up, helping to establish this desired consistency. Another important development that will be felt in the years ahead is the advent of artificial intelligence (AI). Given AI’s ability to work through vast amounts of data at speed, spotting patterns as it goes, this should enable the rapid creation of tailored advice.

The combination of cost pressures, a smaller average pension pot, and increased regulation is also likely to drive greater specialisation within advisory firms. “I think we're going to see more individual IFAs and small groups not doing their own portfolio construction or investment management,” says Douglas Kearney, investment and finance director at Intelligent Pensions. “Much more of that will be subcontracted out to discretionary fund managers and IFAs will concentrate purely on advice.”

The end result of these trends will be a leaner, more tech-oriented industry, but also one that should be better able to deliver high-quality, tailored retirement advice to a client base increasingly in need of it.

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