While New Year resolutions may be waning by now, the next few months will be crucial for financial firms and advisers to support the ‘future you’ of their clients.
As the cost of living crisis continues to bite throughout the winter, clients are in dire need of support in balancing the financial priorities of today without trading in the needs of tomorrow.
Last year, Isas attracted less than half the net total investment flows of 2021, with one survey finding a quarter of parents had already or were planning to dip into their Isa investments to help their children, or to pay for their own household bills as inflation soared to 11.1 per cent.
In November 2022, 27 per cent of adults reported using their savings for daily living expenses in the previous four weeks, up from one in five (20 per cent) in June.
While inflation is forecast to ease in the coming months, sentiment will likely remain depressed, with the UK in recession, further interest rate rises likely, and Britons’ living standards predicted to contract by 3.8 per cent in 2023, more sharply than in 2022, according to the Resolution Foundation.
Clients are facing profoundly difficult choices, and they can have profound consequences. This is where financial firms and advisers have an important role to play, not least in the next few months as we approach financial year end and Isa season.
Balancing credit and investments
Clients are likely to look at pension contributions and Isa subscriptions as some of the easiest things to reduce; they do not usually have an immediate impact on their lives, and psychological biases mean we tend to choose behaviours with immediate or short-term payoffs over longer-term ones.
However, the impact of this reduction may have a huge impact further down the line on their quality of life, their disposable income and even the age they can stop working.
For some, it might be a choice of Sky TV subscription now or retirement expectations in the future. For others though, the decision may not be as simple. Investments may be one of many other non-essentials that could be chosen to cover rising costs.
We as an industry need to recognise that some individuals may not have the experience or knowledge to make decisions about their future, particularly those with little understanding of the tax benefits of pension or Isa contributions.
They could be over-emphasising their present circumstances, inadvertently sacrificing investments that will pay dividends (literally and figuratively) over different timeframes.
Making financial decisions tangible
While the consumer duty mandates firms to help customers achieve good outcomes and avoid harm, this approach also protects firms in difficult financial times. We have already seen the strong inflows of 2020 and 2021 reversed, with potential for this to continue or worsen this year.
While the number of people moving into unsustainable debt increases, there are another group of people falling into what has previously been called the ‘just about managing’.
How do firms engage with these people to help them navigate the need to balance paying off debts – especially when interest rates are rising – with building a long-term investment strategy?
Over the long term, equity performance is at least in the same ballpark as property investments. The latter are often considered, in the UK at least, as the safest and best-performing asset. It is up to the industry to make investment goals more tangible for more people, providing them with the tools and knowledge to make informed decisions.
We know that there is an advice gap in the UK, which means access to paid advice is prohibitively expensive for a large section of the population. But there is a space for other distributors, such as platforms, to help those that need more access and guidance to allow them to make the right decisions.
Hard choices
The debate around choosing between paying down debt and investing can be like trying to solve a riddle.
We know that a decision today to resolve a short term cashflow issue, could have a significant impact on retirement age, or it could affect the benefits from a tax efficient account. Retirement plans and emergency savings are both critical pieces of your overall financial puzzle.
Advisory firms have the skills, knowledge and duty to provide accessible route maps through the financial maze – especially in challenging times.
If firms fail to respond to these pressing client needs, new financial habits can take root in place of Isa subscriptions or pension contributions, with serious consequences for the individuals, society and advisory firms alike.
Dom House and Chris Lamb are consultants at Simplify Consulting
(Photo via Fotoware/FT Montage)
