For the other three options, we expect that D2C providers will use multi-asset passive funds, with a lower risk-return profile for investors starting to make near-term withdrawals and a medium-term risk-return profile for investors starting to make medium-term withdrawals.
While 'relative risk' traditional multi-asset passive funds could be one option for D2C providers, we expect target date funds to have an important role to play in non-advised drawdown.
What does this mean for advisers?
While the policy is aimed at D2C providers, there have been consistent read-throughs for financial advisers from the outset.
Now that this is hard-coded into policy, we expect the forthcoming changes in the D2C market will create pressure on advisers in four different dimensions: comparison, cost, appropriateness and governance.
• Comparison: To evidence that the investment options they offer to customers in drawdown are of comparable appropriateness and value for money to that which can be obtained in the retirement pathways non-advised market. Indeed, there is talk that AS2 may result in the reintroduction of an RU64-style rule that makes comparisons to retirement pathway schemes mandatory, as with stakeholder.
• Cost: The cost of providing advice in retirement is not capped, and comes on top of the total cost of investing which is being anchored at 0.75 per cent. If advisers charge typically 0.5 per cent to 1 per cent we anticipate good value for money for advised clients in retirement will be a total cost of ownership (a term I define for advice plus total cost of investing, defined above) of 1.25 per cent to 1.75 per cent.
• Appropriateness: While target date funds have a key role to play in the non-advised market as a 'one size fits all' default strategy for different cohorts of investors, we believe that advisers can take a more nuanced approach to building a decumulation strategy. Whereas target date funds assume a single risk profile, and a single investment term starting from the year in the fund’s name, a managed portfolio approach, by contrast, enables a more granular approach to considering risk-return and time horizon. This enables a more client-centric approach to retirement planning that can be more aligned to an investor’s 'withdrawal profile'. Finally because model portfolios are not unitised, they can be delivered at a lower cost than a multi-asset fund or target date fund.
• Governance: Just as D2C providers and manufacturers will have product governance obligations on the investment options they facilitate for retirement pathways, advisers have product governance obligations on the investment options they select for their centralised retirement proposition. Every aspect of product governance should be considered with respect to CRPs, and again the decision as to whether to select funds or to delegate to managers should be viewed within this context.
AS2
