Last year will be remembered as the year of regulation for many financial advisers, as an array of rules came into force, all with an intended aim of better client outcomes, writes Catriona McInally, business develoment manager at Prudential UK.
Whether or not the desired effect has been achieved; one thing for sure is that, as a result, advisers are having to work harder to demonstrate the value add service they provide.
From annuity to uncertainty
Regulation aside, there are a few key events that have changed the role of a financial adviser in recent years.
The first one is the Retail Distribution Review (RDR), which overhauled the way advisers were remunerated.
Secondly, and probably the most important, was pensions freedoms.
Prior to April 2015, over two-thirds of clients would have purchased an annuity in retirement to provide a guaranteed income.
Other clients took their pension benefits from their defined benefit scheme – also providing a secure guaranteed income for the rest of their lives.
Determining future income
According to The Pensions Regulator, around 400,000 people have chosen to transfer out of their defined benefit pension scheme and now, according to FCA data, 89% of clients either took their whole fund or a withdrawal from their pension pot rather than buy an annuity.
In addition, defined benefit pension schemes are increasingly few and far between.
The decision to move from a guaranteed income in retirement to an environment where market performance or ‘lack of will’ determine future income is no easy decision and one where a financial adviser is normally crucial.
A client’s income in retirement is left in the adviser’s hands, at least for those who choose to manage the client’s portfolio.
Breathing space
This comes at a time where awareness around mental health is at an all-time high.
It is recognised by the mental health charity, Mind, that money worries are one of the top contributing factors to peoples’ mental wellbeing.
Morningstar released a paper recently discussing financial health where it is not uncommon to come across clients who are financially wealthy yet so terrified of running out of money that it prohibits them from making investment decisions as they seek peace of mind.
This can change the traditional role of the financial adviser to that of a life coach or planner.
Having the ability to help clients feel confident and empowered that they will have enough money to retire when they want, or to not outlive their pension, or indeed have the ability to pass it on to the next generation is definitely a real value add.
Taking the time
Ultimately, the task of putting clients in a position where they feel more empowered or comfortable with investment risk or where they have peace of mind involves quite a lot of time in front of the client.
It’s important to highlight that it is not just their pension pots that are important.
Due to flexibility created under pensions freedom and other available personal allowances; using other investment pots, such as Isas and investment bonds, to help generate a tax-efficient income will also be key.
Finding out what motivates clients, their financial wellbeing, plans for the future, using cash flow modelling and making full use of the allowances available will all help that process.
And of course, clients will be able to understand the value their adviser has added, especially in light of the cost disclosure requirements under Mifid II and the Product Intervention and Product Governance Sourcebook (Prod).
I’m sure all advisers reading this will be thinking the same thing… “sounds ideal but where do I find the time?”
Target beats value
Having a robust centralised investment proposition (CIP) at the heart of your client proposition will allow advisers to free up time and divert this to client-facing work.
Understanding their client bank and how their CIP fits clients’ needs will of course be imperative, and also how this ties in with Prod‘s product oversight and governance requirements.
Prod has brought in a set of rules that sets out how advisers should construct their investment propositions.
One of the key aspects of this is target market information.
Segmenting clients by target market and not by value of investments should help ensure the products and funds recommended are suitable for clients.
It would be nonsensical to think that a single investment proposition will suit a client who has 20 years to go before retirement and one who is just about to retire, just because they have a similar amount to invest.
Both may have identical investment pots and attitude to risks but they are about to embark on two very different journeys.
See a need, fill a need
So what does a robust CIP look like?
There will be many varieties of what good looks like but what is most important is that it meets the needs of your target market.
An adviser’s CIP should be adaptable to their clients’ needs. It should cater for various risk appetites, time horizons and preferences.
For example, with more and more clients looking for ‘ethical’ investment solutions and the regulator becoming increasingly interested in ESG – it’s a good time for advisers to question whether this has been incorporated this into their CIP.
Clearly, a CIP will need to be transparent from a cost disclosure perspective in a way that is easy for the client to understand. Is should be independent, unrestricted and easy to review.
The value to an adviser’s business of a robust CIP is a demonstrable process which is easy to understand, structured and documented.
Not only will this demonstrate to clients the value you add, it will almost certainly, in time, add value to advisers and their businesses.
This article was written for International Adviser by Catriona McInally, business development manager at Prudential UK.
