With rising inflation and huge increases to the cost of living hitting the economy, financial advisers will need to introduce more innovative solutions to their retirement offerings.
The warning comes from FE fundinfo, a leading global fund data provider and technology company, who reveal that while the majority of financial advisers are currently offering a Centralised Retirement Proposition (CRP), it varies little from their Centralised Investment Proposition (CIP) with more than half (51%) continuing to maintain a client’s existing risk profile once they hit retirement.
There is a broad consensus among advisers that capital protection in the early retirement years (typically one to three years) is important because of the potential impact that falling markets will have on future withdrawal amounts. Holding cash – or cash-like – investments remains a popular strategy, but also having an investment return that keeps pace with inflation over the longer term will be equally important.
With market volatility impacting retirement portfolios across the globe and a shift from ‘Generation DB’ to ‘Generation DC’ entering retirement, we need to reframe the adviser/client conversation about risk, so that the inherent risk is not viewed in terms of an investment losing its value, but rather the client running out of money over the course of their retirement.”
Toyosi Lewis, Retirement Specialist
2022 Financial Adviser Survey
The findings come from FE fundinfo’s 2022 Financial Adviser Survey which reveals that traditional ways of thinking in retirement are still prevalent within the industry. Three quarters of advisers believe that either a 3% or 4% annual drawdown rate would be sustainable, despite the Bank of England predicting inflation to reach 10% by the end of the year, while sequencing risk – a market fall early in retirement reducing the length that a portfolio will last – is still seen as the biggest risk a client can face. This is seen to be more of a threat than longevity risk (the risk of a client outliving their retirement portfolio), inflation risk, failure risk (the risk that the client spent more than they had available) and volatility risk (the need to access a fixed income when the portfolio value has fallen).
The role of the client
The introduction of greater pensions freedoms in 2015 led to largely unfounded fears that consumers would be tempted to burn through their pension pots. Nonetheless, the 2022 Financial Adviser Survey also reveals that a fundamental realignment of attitude to risk among consumers is needed in retirement. When asked how many of their clients would be prepared to take on greater risk in retirement, three quarters of advisers said that less than a third of their clients would be prepared to tolerate greater levels of risk in their portfolios, with 55% of advisers saying only 20% of their clients would consider changing strategy.
“No retirement plan is, or will ever be, risk free. Moving to a decumulation approach essentially replaces one set of risks with another. For many investors it may seem counterintuitive to think about increasing their risk exposure as they approach retirement, but in a decumulation portfolio, the bigger risk might be running out of money rather than the value of an asset falling. As an industry we need to do more to empower advisers with innovative investment solutions, in order to have these conversations with clients and move away from models and strategies which have perhaps run their course.
“With the fastest price rises we’ve seen in decades, rising inflation has been the topic on the minds of many financial advisers and their clients. Market volatility has also focused minds on the impact it has on client portfolios. Drawdown is complex and there is no “perfect” solution to mitigate the challenges clients will face in retirement; having a process in place whilst maintaining a flexible outlook and approach is useful to anticipate, and react to, changing events as they occur.”
Toyosi Lewis, Retirement Specialist
The 2022 Financial Adviser Survey was conducted in November and December 2021. It consisted of 60 questions and was completed by over 200 UK-based financial advisers.
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