The £700 billion question?

We recently attended an investment forum. One of the discussions focused on the opportunities (if that is the right word) in the decumulation market.

What I saw as they discussed this was a crash about to happen unless there is a proper financial plan in place (whether this is done by you or by appointing a financial planner to help).

The baby boomers have only just reached retirement (2011 being the first year) and it is estimated that we will see £700 billion of assets move into the post retirement space over the next decade.

The presentation highlighted with increased longevity drawdown in retirement may be the only option to providing a sustainable income, as well as providing the flexibility and control that people desire.

To some extent I agree with this statement but there are significant risks with drawdown.

The first risk is that drawdown must be seen as the end solution. Financial planning is about identifying needs then drawing up the best way to deliver on those needs.

So for example, if I wanted £2,000 net in retirement then I need to look across all my investments to achieve that income. This will include my state pension, any income I can generate from investments (ISA income is tax-free, and “income” can be taken from non ISA investments potentially tax free where the CGT allowance is used) and I could also turn to my pension pot as well. I might also have other sources of income for example from a rental property etc.

Once I know all my sources of income I can look at the best and most tax efficient way to receive that income. So for example I might choose drawdown because I want to use the tax free cash to provide a tax free income but have the flexibility to switch on additional income if I need it.

So the first risk is seeing drawdown as a product when actually it is one part of the overall solution.

The second part which I found interesting was the risk of volatility. The argument was that greater volatility in a portfolio will eat into the value quickly even if the end performance is better than a more cautious portfolio.

The extreme example they used is shown below (using high volatility):

	Portfolio 1	Portfolio 2
Return sequence	27%, 7%, -13%......	-12%, 8%, 28%......
Average return	6% p.a.	7% p.a.
Volatility	20%	20%
Ruin age	94	84

Data is illustrative only – examples start at age 65 and assume 9% income is drawn per year and the portfolios have a repeating three year return sequence as shown above.

The point is that financial planning is not just about identifying the income needed and the solutions to deliver that need but also about building a portfolio which exhibits low volatility, avoids large short term losses and has the ability to generate sufficient growth.

The danger or risk of going direct is that unless the investor understands about portfolio design and make up then they are in danger of creating an extremely volatile portfolio which won’t help them in retirement. Equally if you have a financial planner then you should be asking for data that demonstrates that the portfolio you are in is operating in the way it should.

With £900 billion at stake this is not an argument for or against going direct or having a financial planner but an argument that good financial planning must be readily available so individuals can make informed and wise decisions in their retirement.  

To be or not to be that is the question?

As a business we have tried to be as transparent as we can when it comes to charges. Last year all our clients signed a new fee agreement, our website sets out clearly what our proposition is and we have the qualifications needed to practice post 2013. I suppose we are in the gold medal position and I can now sit back and be somewhat smug.

Of course for our clients this is fantastic news because effectively nothing has changed, they already know what our fees are and they know what our service proposition is.

But stop the world of financial services decides to make this a little messy. We have been told that perhaps we may need to get new fee agreements signed because they do not refer to adviser charging, everything else is ok. And what seems worse is that some providers may need their own forms signed as well. So now it starts to get messy nothing has changed for our clients except for a word so what do we do?

Just to add to this confusion one wrap / platform provider has launched a new charging proposition. One clean and one not! We only have a small amount of money on this platform and we have been told the money can remain under the old structure. In fact working out the cost difference between the two there really isn’t much difference between the two. However, we manage the clients’ portfolios and may change funds. At this stage we have been told that we can have the old rebate funds forever effectively even if we are using it as a new fund. Confused well I am, effectively the FSA (or new form of the FSA) want us to move to a clean charging structure but it appears this platform is saying we can keep with the old even if we change funds. This doesn’t seem right.

Of course we then move to the question of rebates, we won’t argue for or against but some platform / wrap providers have said they would get special terms for funds but of course they can’t keep the special terms and any rebates can’t be paid as cash unless of course there is a change of heart. So how does it work? Well of course unit rebates to the client. Looking at when you come to take charges from clients some providers may have cash accounts and some may not. Those with cash accounts will expect you to manage the cash to pay charges and those who don’t will take charges by unit cancellation.

And then to add to the confusion with only a couple of months to go the FSA have still not finalised the rebate issue, it is likely to go but they are asking for industry feedback.

Don’t get me wrong a clear clean fee structure is what we need but this has been going on for years, providers can’t deliver a final answer until the FSA sort it out. The FSA have had years to finalise things and they will but about two months before it is due to launch. Of course financial planners have to be ready by 1 January 2013 but direct to consumer well that is another mess that has not been tackled.

And then the question is do you become restricted or independent. I won’t bore you too much on this but I can become independent but restrict the business I do, or I can be restricted and restrict the business I do but look at solutions outside my restricted remit if that is right for the client. So actually there is little difference between the two.

So back to the beginning I thought we were ready but now I am not sure……

As for Joe Public, as the press prints more about fees how are they really going to be able to make informed decisions.

It’s a confusing market – charging for advice

Revolutions in financial services don’t happen often but we are facing one. The big talking point is that from 1 January 2013 individuals wanting to use a financial adviser / planner will have to pay a fee for their services.

This in itself may sound surprising because surely most people are already paying some form of fee. But the purpose of the change is that clients will need to agree to the fee and that fee needs to be transparent. 

In this blog I want to explore two areas, the potential trigger for advice and what a fee actually means. 

A recent report highlighted some of the triggers for seeking advice. Unsurprisingly the most powerful trigger for seeking advice is recognition by an individual of the limits of their own knowledge on a particular issue. The key issues appear to be around retirement planning and investing. The main issue in both cases is the confidence to do the research to get the best possible solution. 

The report then considers who will be able to pay for advice in the brave new world. At this point there are areas of the report that I think help to confuse this new world. The argument in the report is that advice is based on the top tier of earnings in the country, the 25% of the country who have total household income of £50,000 plus.

I wanted to explore this further because I couldn’t understand why there is this sudden leap to considering earnings when identifying those available for advice. 

To do this we need to look at what is coming in from 1 January 2013:

1.  Clients need to agree to a new charge called adviser charging – this can be a flat fee or a percentage of the investment. This is not in addition to what they are currently paying
2. This new charge must be clear and transparent and clients need to be aware what they will get for this service

So for example if you had £100,000 in a pension and you are currently paying your financial adviser / planner 1% a year this is paid out of the investment each year. In many cases this is fully transparent already and you are fully aware what service you receive for this fee.

From 2013 this 1% becomes an adviser charge, so actually there is no fundamental change. Confused yet! I was initially but then I realised all of this goes a little deeper. If you have agreed a fee of 1% with your adviser / planner, you can see that charge coming out of your investments and you know what your service proposition is then there is no change. 

The change may come from the fact that the adviser sets a limit on funds which are profitable to the business so perhaps £100,000 but in reality they probably will have already excluded unprofitable clients.

So why the focus in the report on earnings? Within the report I noticed that actually some advisers are charging the following:

1. A retainer fee for their services – this seems to vary but can be as low as £30 per month to £100 plus per month
2.  My thoughts were if you were charging a retainer fee or any fee then there would be no other charges. So by that I mean you pay the retainer then an hourly fee of say £190 per hour (rates charged by some banks). In reality some planners charge a retainer fee plus a management or investment charge which can vary but typically sits around 1% a year

So in reality if you have an adviser that charges a retainer fee than the salary becomes an issue depending how that retainer is taken. But it made me think the papers print confusing messages about fees, reports seem to favour one route or another and all of this makes it really difficult for individuals but cutting through this:

1. From 1 January 2013 your financial adviser needs to clearly outline their fees to you
2. These fees can be taken from your investments, so you don’t need to physically pay the money
3. Your financial adviser / planner has to clearly outline their service proposition and you need to agree whether this is worth the fee you are paying

When you consider the final point the report highlighted what the individuals surveyed considered as demonstrating fair value:

1. Financial advisers / planners who demonstrated an immediate and deep understanding of individual clients and their needs and are committed to acting as a ‘trusted’ adviser
2. Have a strong focus on pensions and / or enabling clients to achieve a secure retirement
3. Are proactive in portfolio management and alerting clients to market and financial events that may affect them 
4.  Can demonstrate measurable results and benefits to clients

In summary for many individuals there will be no change but others may find themselves cut adrift. Surely this is the message the industry should be printing.