The introduction of investment pathways at the start of February 2021 has put non-advised consumers on firmer footing when navigating the drawdown pension landscape. But what does this mean for other types of consumers? And how can you demonstrate value to all your clients in drawdown? Read more to find out.
Those who choose to enter drawdown without advice will now be given four pathways to choose from based on when they need to access the money and their preference for selecting either a flexible or guaranteed income in retirement.
While these investment pathways represent an important step in helping consumers make the right decisions at retirement and ensure their retirement pot lasts the distance, we must not neglect the risks to those taking advice, too.
Advised, guided or going alone
According to recent data collected from regulated firms that provide retirement income products, there are still a high proportion of individuals seeking regulated financial advice rather than opting to go it alone or receive guidance.
Figures published by the Financial Conduct Authority in September 2020 illustrate that of pension pots entering drawdown, 63% received regulated advice, with 10% using the government’s flagship guidance service, Pension Wise. The remaining 27% sought neither advice nor guidance.
Whether people choose advice, guidance or opt to go it alone, many of the same risks apply. The key difference here is that advised clients have a regulated expert to explain, consider, and mitigate the relevant risks when recommending and reviewing an income drawdown strategy. Advised pots require prudent and regular management. Most long-term drawdown strategies will invest in risk assets such as equities, subjecting portfolios to frequent up and down movements.
Safely navigating volatile markets is crucial
Recent events have issued a stark reminder of the threats to drawdown pot management. As COVID-19 worked its way around the globe, the measures introduced by national governments to halt its spread and ultimately protect lives have had negative consequences for economies. True to form, stock markets reacted by plummeting south. Close to home, the UK’s FTSE 100 dropped below 5,000 points for the first time in a decade and some 1,600 points lower than it kicked off the year.
Such a sharp downwards trajectory may have exposed your clients to sequencing risk, which occurs when market volatility combines with cash flow. Those continuing to make withdrawals in poor market conditions risk compromising future portfolio performance.
Although sequencing risk can occur in both the accumulation and decumulation phases, it’s most prevalent in the years on either side of retirement.
A further risk to consider is pound cost ravaging: a combination of volatility drag and sequencing risk, exacerbated by regular withdrawals over a sustained period. On the plus side, as advisers, you were well-positioned to articulate the potential dangers here to your clients and react accordingly, perhaps by either suspending income withdrawals or turning to less volatile assets – such as bonds and cash – until the portfolio recovered.
To find out more about the impact of pound cost ravaging, read our accompanying blog; Why Your Drawdown Customers Need to Understand Market Volatility.
Demonstrating value to your drawdown customers
In its recent Evaluation of the impact of the Retail Distribution Review (RDR) and Financial Advice Market Review (FAMR), the FCA raised concerns about advice fees, specifically around price clustering.
"Our analysis indicates that ongoing services with a 1 per cent annual adviser charge did not have noticeably different features to those charging 0.5 per cent annually,” the FCA said.
So, in short, you must prove the service you provide is worth the charge. As many of you will attest, what your clients often value most is time, especially during uncertain periods.
Even in a post-Covid world and the resumption of everyday life, these risks will persist. So how can you help your clients manage drawdown pots effectively? Although periods of portfolio volatility is largely uncontrollable, you can at least account for it. Cashflow modelling tools from EV leverage a stochastic economic scenario generator, considering various economic variables, helping you manage clients’ drawdown pots effectively. It can also support the demonstration of value to your clients, an area that the regulator is taking a keen interest in.
You can help free up time by turning to widgets and tools, such as our Risk Profiler, which lets you email the questionnaire ahead of any client meetings. Allowing you to allocate greater resources to either planning or revisiting a client’s financial goals, and perhaps most crucially, guarding them against the inherent risks of decumulation while justifying the fee you charge for your service.
So what next?
Find out more about stochastic forecasting and why we believe it’s the most credible model by reading our eBook; Modelling Future Outcomes: Why Stochastic is the Credible Choice?