Tuesday, 06 January 2015 16:14
Technical Update: Retirement revolution
So will they buy Lamborghinis or long-dated gilts, diamonds or gold-plated drawdown plans? Quite how those approaching retirement from next April will adjust to the new retirement planning freedoms is the great unanswered question.
One person who has tried to answer the question is Distribution Technology founder Ben Goss. In this insightful article based on a White Paper produced by his company, Mr Goss said April next year will see a "pensions tsunami of retirement money and a torrent of planning questions."
Managing retirement assets will become ever more important, he believes, if people are not to run out of money in retirement but how can Financial Planners prepare for sweeping changes which will alter the decisions at retirement forever.
Last year in the UK, gross investment into insured and uninsured funds was around £170bn and pension reform could add an additional £10 billion a year, says Mr Goss, but the questions and choices will multiply as 'at retirement' assets grow.
Retirement revolution: Are clients and professionals totally prepared for the impending pensions tsunami?
A tsunami of retirement money is rapidily racing towards the wealth management industry coastline, with a tempest of planning questions already threatening to overwhelm professionals. The next few months will see the start of a long term rise in the sea level for managed retirement assets and planning as consumers begin to utilise their lifetime savings in more active ways. So what should Financial Planners be doing to prepare for the coming deluge?
Last year in the UK, gross investment into insured and uninsured funds was around £170bn and pension reform could add an additional £10bn a year. This rise, along with the growth of defined contribution assets, higher auto-enrolment and the retiring baby boomer generation means 'at retirement' assets and planning will grow significantly. JP Morgan expects this market to treble by 2023, and Fidelity believes that a staggering 70 per cent of UK wealth sits with baby boomers retiring over the next decade1.
The first ripples of the big wave are already reaching the beach. Annuity sales have fallen by almost half relative to last year, and according to some analysts will crash from around £14bn in 2013 to around £4 billion after the reforms, while income drawdown product sales have increased by 55 per cent.
{desktop}{/desktop}{mobile}{/mobile}
This seismic shift is likely to generate three key impacts from this structural shift:
1) Rising demand for retirement planning causing a serious cost-to-serve challenge. With increasingly complex choices on offer, consumer confidence in self-directed decision-making is low. This is both an opportunity and a challenge for planners.
2) Growth in income funds and a focus on risk adjusted returns. As annuities crash there will be an accelerated flow into risk managed, multi-asset funds and portfolios delivering income. Regular risk profiling of the client and their investments is crucial during retirement. As this market matures, the focus will be on risk- adjusted returns, net of fees.
3) Hybrid structured products offering a 'third way'. The demand for both flexibility and certainty in retirement income will generate a myriad of exciting new hybrid product structures. More sophisticated risk-based, cash flow planning using clear, transparent assumptions and engaging outputs, will be needed to help planners and consumers make appropriate decisions.
Compulsory annuitisation meant that retirement planning used to be a 'once and done' activity. Last year an FCA study showed that in 2013 60 per cent of annuities were bought from existing pension providers. The FCA concluded that despite industry efforts to encourage people to shop around, significant barriers still exist, including lack of confidence, not fully understanding the decisions required, and simple inertia. Professional retirement planning remains a minority sport; even for wealthier individuals with more complex needs.
As consumers wake-up to the ever more complex and numerous retirement choices, there will be significantly more people looking for advice. Somewhat scarily, our research shows that consumers are currently remarkably unconcerned about their retirement income choices with just 3 per cent of people considering it an issue. Our research confirms that most surprisingly, the majority are nervous about making retirement choices. The stakes are high, with little margin for error, thus increasing the need for professional planning particularly for those with savings pots in excess of £100,000. For these consumers, a financial plan, product implementation and an annual review make absolute economic sense. The cost of quality advice delivery and regular servicing poses a challenge. For a mass affluent customer paying £125 per hour1 for an average of eight hours adviser time and eight hours admin, the minimum realistic fee is £1,300. Unfortunately, cost to serve does not correlate with case size. Planners put in the same work on an investment of a few tens of thousands as one of hundreds of thousands. With the average UK pension pot of £36,800; a fee of £1,300 would reduce that pot by 3.5 per cent. So how can consumers be educated into expecting to save their hard earned money by using technology?
People understand that buying online usually means lower prices. Evidence suggests that while Financial Planning tools will improve education and understanding, these are unlikely to drive decision making on such complex choices. At the shallow end of the pool, for relatively simple rate-driven decisions for example, only 6 per cent of annuity buyers actually consult a comparison website. At the deep end, when the choices are much more complex, most will be even less confident. The latest evidence from the US shows that tools and education alone don't make a meaningful impact on investor enrolment and case size.
{desktop}{/desktop}{mobile}{/mobile}
So what will work? Financial Planners will have to work hard to lower their cost to serve by:
1) Adopting front office and Financial Planning technology, reducing re-keying and the cost and risk of the planning process, implement recommendations speedily, the front office will need to integrate seamlessly into practice management and CRM systems.
2) Using aggregation technology to gather and publish contract enquiry based valuations on arrangements and portfolios, moving away from paper and radically reducing servicing time.
3) Adopting an omni-channel strategy, providing engaging tools to educate consumers on their choices, while accepting that:
a) the offer will have to be sufficiently compelling with significant time and cost benefits to overcome customer inertia;
b) For more complex decisions, a 'share my plan' option with an adviser who can assess the information already entered or with a telephone based agent who can walk through choices.
With the dramatic reduction in automatic annuity purchases there has been a rise in multi-asset investing for growth and regular income. A 65 year old woman retiring this year has a 1-in-4 chance of spending at least 30 years in retirement. Given the current economic backdrop, consumers now need a robust discussion around risk and return but, the risk trade-off required to achieve their financial goal is not at the forefront of a customer's mind. Understanding changing risk profiles is crucial in retirement as people progress from active semi-retirement to full retirement and old age, with the potential need for care and perhaps estate planning. During pension planning a risk budget is set by the customer, and as investments into risk-profiled, multi-asset income funds increase, there's a growing demand not just to demonstrate management within this budget2 but to demonstrate risk-adjusted returns too. As the fund risk profiling market matures and differences between risk profiled funds and risk managed funds (that is funds run to a risk target) become clearer, performance after fees is increasingly becoming a question asked by planners and firms.
Taking advantage of this wave of retirement assets and planning opportunities requires:
1) Delivering strong risk-adjusted returns;
2) Annual reviews;
3) Ensuring asset model integrity to avoid unsuitable outcomes
Hybrid product structures are already being developed that aren't traditional annuities but that offer some guarantee to income or capital. Some provide clear guarantees while others target ranges of income or growth depending on investment performance.
{desktop}{/desktop}{mobile}{/mobile}
As State Pension ages rise, an annuity may often still be the right product for many retirees. In the US, where there is no requirement to annuitise, US $220 billion in annuities were written in 2012 and annuities account for 9 per cent of the US $20 trillion retirement market. Variable annuities are a very common feature of US retirement planning, offering considerably more flexibility than a traditional UK annuity.
However there is a further challenge. Behavioural finance shows that humans have two modes of thought. The first is fast, instinctive and emotional, the second is slower, deliberative and logical. Retirement planning does not fall within the first mode; it doesn't deliver the same thrills as planning your next holiday. It requires significant, conscious effort. Add to this the fact that humans are naturally optimistic (Nobel laureate Daniel Kahneman calls it "pervasive optimistic bias") and tend to rely on intuition when there are too many variables to be rationally considered, retirement planning is up against it. So it's important that Financial Planners can rely on high quality, risk- based tools with clear and engaging outputs and clear, transparent assumptions from whichever reliable source they choose.
Next April's pension reforms are already generating significant waves ahead of the tsunami of retirement wealth and creating huge opportunities for forward thinking Financial Planners and asset managers.
1 DT commissioned survey September, 2014. 100 consumers, 45 years and older, equal male and female who own an investment or pension
2 Assumes: planner salary of £85,000 pa and administrator salary of £28,000. In addition; NI, 20 per cent On Cost including benefits, 160 billable days a year after holidays and a 70 per cent billable utilisation rate, 40 per cent margin contribution.
3 DT has seen risk targeted funds managed by clients grow from £1.3bn to £2.4bn over the last 12 months to September, 2014
BEN GOSS DISTRIBUTION TECHNOLOGY
Ben is co-founder and chief executive of Distribution Technology. Formed in 2003, DT has become a leading provider of Financial Planning and practice management technology. Over 3,000 advisers from more than 200 firms use DT's Dynamic Planner each month to plan and manage their clients. 70 investment managers with over £50bn of assets use DT's risk profiling process. In 1998, Ben founded Sort, the UK's first regulated online advice firm, selling the business in 2000 to US 401K pension advice provider mPower. Prior to Sort, Ben was a financial services strategy consultant with PwC and Coopers & Lybrand.
This email address is being protected from spambots. You need JavaScript enabled to view it.
0118 903 5850
@bengoss
As ever, Financial Planner welcomes your ideas and suggestions for Technical Update, a topical look at technical issues facing the Financial Planning sector each month. To email suggestions contact: This email address is being protected from spambots. You need JavaScript enabled to view it.
One person who has tried to answer the question is Distribution Technology founder Ben Goss. In this insightful article based on a White Paper produced by his company, Mr Goss said April next year will see a "pensions tsunami of retirement money and a torrent of planning questions."
Managing retirement assets will become ever more important, he believes, if people are not to run out of money in retirement but how can Financial Planners prepare for sweeping changes which will alter the decisions at retirement forever.
Last year in the UK, gross investment into insured and uninsured funds was around £170bn and pension reform could add an additional £10 billion a year, says Mr Goss, but the questions and choices will multiply as 'at retirement' assets grow.
Retirement revolution: Are clients and professionals totally prepared for the impending pensions tsunami?
A tsunami of retirement money is rapidily racing towards the wealth management industry coastline, with a tempest of planning questions already threatening to overwhelm professionals. The next few months will see the start of a long term rise in the sea level for managed retirement assets and planning as consumers begin to utilise their lifetime savings in more active ways. So what should Financial Planners be doing to prepare for the coming deluge?
Last year in the UK, gross investment into insured and uninsured funds was around £170bn and pension reform could add an additional £10bn a year. This rise, along with the growth of defined contribution assets, higher auto-enrolment and the retiring baby boomer generation means 'at retirement' assets and planning will grow significantly. JP Morgan expects this market to treble by 2023, and Fidelity believes that a staggering 70 per cent of UK wealth sits with baby boomers retiring over the next decade1.
The first ripples of the big wave are already reaching the beach. Annuity sales have fallen by almost half relative to last year, and according to some analysts will crash from around £14bn in 2013 to around £4 billion after the reforms, while income drawdown product sales have increased by 55 per cent.
{desktop}{/desktop}{mobile}{/mobile}
This seismic shift is likely to generate three key impacts from this structural shift:
1) Rising demand for retirement planning causing a serious cost-to-serve challenge. With increasingly complex choices on offer, consumer confidence in self-directed decision-making is low. This is both an opportunity and a challenge for planners.
2) Growth in income funds and a focus on risk adjusted returns. As annuities crash there will be an accelerated flow into risk managed, multi-asset funds and portfolios delivering income. Regular risk profiling of the client and their investments is crucial during retirement. As this market matures, the focus will be on risk- adjusted returns, net of fees.
3) Hybrid structured products offering a 'third way'. The demand for both flexibility and certainty in retirement income will generate a myriad of exciting new hybrid product structures. More sophisticated risk-based, cash flow planning using clear, transparent assumptions and engaging outputs, will be needed to help planners and consumers make appropriate decisions.
Compulsory annuitisation meant that retirement planning used to be a 'once and done' activity. Last year an FCA study showed that in 2013 60 per cent of annuities were bought from existing pension providers. The FCA concluded that despite industry efforts to encourage people to shop around, significant barriers still exist, including lack of confidence, not fully understanding the decisions required, and simple inertia. Professional retirement planning remains a minority sport; even for wealthier individuals with more complex needs.
As consumers wake-up to the ever more complex and numerous retirement choices, there will be significantly more people looking for advice. Somewhat scarily, our research shows that consumers are currently remarkably unconcerned about their retirement income choices with just 3 per cent of people considering it an issue. Our research confirms that most surprisingly, the majority are nervous about making retirement choices. The stakes are high, with little margin for error, thus increasing the need for professional planning particularly for those with savings pots in excess of £100,000. For these consumers, a financial plan, product implementation and an annual review make absolute economic sense. The cost of quality advice delivery and regular servicing poses a challenge. For a mass affluent customer paying £125 per hour1 for an average of eight hours adviser time and eight hours admin, the minimum realistic fee is £1,300. Unfortunately, cost to serve does not correlate with case size. Planners put in the same work on an investment of a few tens of thousands as one of hundreds of thousands. With the average UK pension pot of £36,800; a fee of £1,300 would reduce that pot by 3.5 per cent. So how can consumers be educated into expecting to save their hard earned money by using technology?
People understand that buying online usually means lower prices. Evidence suggests that while Financial Planning tools will improve education and understanding, these are unlikely to drive decision making on such complex choices. At the shallow end of the pool, for relatively simple rate-driven decisions for example, only 6 per cent of annuity buyers actually consult a comparison website. At the deep end, when the choices are much more complex, most will be even less confident. The latest evidence from the US shows that tools and education alone don't make a meaningful impact on investor enrolment and case size.
{desktop}{/desktop}{mobile}{/mobile}
So what will work? Financial Planners will have to work hard to lower their cost to serve by:
1) Adopting front office and Financial Planning technology, reducing re-keying and the cost and risk of the planning process, implement recommendations speedily, the front office will need to integrate seamlessly into practice management and CRM systems.
2) Using aggregation technology to gather and publish contract enquiry based valuations on arrangements and portfolios, moving away from paper and radically reducing servicing time.
3) Adopting an omni-channel strategy, providing engaging tools to educate consumers on their choices, while accepting that:
a) the offer will have to be sufficiently compelling with significant time and cost benefits to overcome customer inertia;
b) For more complex decisions, a 'share my plan' option with an adviser who can assess the information already entered or with a telephone based agent who can walk through choices.
With the dramatic reduction in automatic annuity purchases there has been a rise in multi-asset investing for growth and regular income. A 65 year old woman retiring this year has a 1-in-4 chance of spending at least 30 years in retirement. Given the current economic backdrop, consumers now need a robust discussion around risk and return but, the risk trade-off required to achieve their financial goal is not at the forefront of a customer's mind. Understanding changing risk profiles is crucial in retirement as people progress from active semi-retirement to full retirement and old age, with the potential need for care and perhaps estate planning. During pension planning a risk budget is set by the customer, and as investments into risk-profiled, multi-asset income funds increase, there's a growing demand not just to demonstrate management within this budget2 but to demonstrate risk-adjusted returns too. As the fund risk profiling market matures and differences between risk profiled funds and risk managed funds (that is funds run to a risk target) become clearer, performance after fees is increasingly becoming a question asked by planners and firms.
Taking advantage of this wave of retirement assets and planning opportunities requires:
1) Delivering strong risk-adjusted returns;
2) Annual reviews;
3) Ensuring asset model integrity to avoid unsuitable outcomes
Hybrid product structures are already being developed that aren't traditional annuities but that offer some guarantee to income or capital. Some provide clear guarantees while others target ranges of income or growth depending on investment performance.
{desktop}{/desktop}{mobile}{/mobile}
As State Pension ages rise, an annuity may often still be the right product for many retirees. In the US, where there is no requirement to annuitise, US $220 billion in annuities were written in 2012 and annuities account for 9 per cent of the US $20 trillion retirement market. Variable annuities are a very common feature of US retirement planning, offering considerably more flexibility than a traditional UK annuity.
However there is a further challenge. Behavioural finance shows that humans have two modes of thought. The first is fast, instinctive and emotional, the second is slower, deliberative and logical. Retirement planning does not fall within the first mode; it doesn't deliver the same thrills as planning your next holiday. It requires significant, conscious effort. Add to this the fact that humans are naturally optimistic (Nobel laureate Daniel Kahneman calls it "pervasive optimistic bias") and tend to rely on intuition when there are too many variables to be rationally considered, retirement planning is up against it. So it's important that Financial Planners can rely on high quality, risk- based tools with clear and engaging outputs and clear, transparent assumptions from whichever reliable source they choose.
Next April's pension reforms are already generating significant waves ahead of the tsunami of retirement wealth and creating huge opportunities for forward thinking Financial Planners and asset managers.
1 DT commissioned survey September, 2014. 100 consumers, 45 years and older, equal male and female who own an investment or pension
2 Assumes: planner salary of £85,000 pa and administrator salary of £28,000. In addition; NI, 20 per cent On Cost including benefits, 160 billable days a year after holidays and a 70 per cent billable utilisation rate, 40 per cent margin contribution.
3 DT has seen risk targeted funds managed by clients grow from £1.3bn to £2.4bn over the last 12 months to September, 2014
BEN GOSS DISTRIBUTION TECHNOLOGY
Ben is co-founder and chief executive of Distribution Technology. Formed in 2003, DT has become a leading provider of Financial Planning and practice management technology. Over 3,000 advisers from more than 200 firms use DT's Dynamic Planner each month to plan and manage their clients. 70 investment managers with over £50bn of assets use DT's risk profiling process. In 1998, Ben founded Sort, the UK's first regulated online advice firm, selling the business in 2000 to US 401K pension advice provider mPower. Prior to Sort, Ben was a financial services strategy consultant with PwC and Coopers & Lybrand.
This email address is being protected from spambots. You need JavaScript enabled to view it.
0118 903 5850
@bengoss
As ever, Financial Planner welcomes your ideas and suggestions for Technical Update, a topical look at technical issues facing the Financial Planning sector each month. To email suggestions contact: This email address is being protected from spambots. You need JavaScript enabled to view it.
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