For smart advisers, the pensions opportunity is only just beginning

How to serve

Now what this really all shakes out to is functionality and the ability of providers, whether advised or direct-to-consumer, to serve this space effectively. The paper we’ve been working on – which you can download free from our website (it’s imaginatively called ‘Retirement Income in the Direct Platform Market’) – gives lots of detail about who does what, but suffice it to say that it’s far from a level playing field.

This poses an interesting conundrum. Should investors who can’t/won’t/don’t want to use an adviser have access to adviser-style functionality in order for them to defeat their own self-limiting behavioural biases? Or should they be starved out so they don’t get ideas above their station?

To be clear: I’d love to see some kind of mechanism that ensures everyone can get access to professional financial planning at the point of retirement (whatever that is any more). I suspect even state funding for that would be money well spent. 

But here’s an uncomfortable truth: when we look at how self-managed drawdown clients who are drawing income cope with the vagaries of the stock market, quite different patterns emerge from those who use an adviser. We all know that advisers and consultants and academics beat themselves up to identify sustainable withdrawal rates (and that’s a column for another time). But those clients who have put the better part of £100bn into direct drawdown in the past few years aren’t as interested in that.

I don’t have a big stat for this; I have to work on anecdotal experience from talking to non-advised drawdown providers. But given that, I think there is a far higher incidence of clients changing their income on a monthly or regular basis than in the advised sector, where a rate tends to be set and then only adjusted annually. 

It seems that many self-managed drawdown clients are exhibiting behaviours that are a sort of live-fire exercise version of what cash flow planning is meant to do. Markets down? Feeling edgy? No problem – we won’t replace the bathroom this quarter as we were planning. We’ll hold off on the South Africa winter holiday and consider freezing our ass off in Whitby instead. If stuff comes back round we’ll take a bit more out and that won’t hurt as much.

The consequences

Where does it all end? Well, those 3.6m retirees aren’t all sitting on £250,000 self-invested personal pension pots. Many just need a bit of a hand. This industry is going to build tools for them, and although they haven’t been very good so far, that’s probably only a matter of time.