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Will advisers become more like banks?

28 May 2016

The historical nature of advisers’ relationships with their clients might be about to change, writes Jennifer Hill

Piggy bank

Pension freedoms are seeing a growing band of people in retirement look to their advisers to help them manage income withdrawals – just like popping to the bank to get money out.

Alistair Wilson, Head of Retail Platform Strategy at Zurich, says: “Following the pension freedoms, it’s likely that more clients will be calling on advisers to turn their income levels up and down over the course of a year.

“It’s not beyond imagination that advisers will become more like banks, acting as a point of contact for clients and delivering their income needs later in life.”

Sparked interest

In his 2014 Budget, Chancellor George Osborne introduced the concept of allowing people to use their pension fund like a bank account and, from age 55, dip in and out of their money as they choose.

While advisers tend to be uncomfortable with such an analogy, it has sparked the public’s interest and many intermediaries have seen an increase in business from people keen to capitalise on the new rules.

Phil Morris, Head of Distribution at Gale and Phillipson, which has five offices from Newcastle to London, says: “The number one area of retirement advice since April last year has been related to the take-up of the new pension freedoms – and this is largely because people are generally more aware of pensions.
“We’ve seen growth in the amount of pension business since the introduction of the freedoms, with our financial advisers seeing a definite increase in the number of clients seeking advice on their pension.

“Almost three-quarters of our current total business [70%] is now pension freedoms related, not just from people looking to take money out of their pensions per se, but also those who are thinking about how they can accumulate their pension pots.”

Income reviews

Brian Bradley, a Chartered Financial Planner at Dorset-based Clarke & Partners, believes pension freedoms represent a “big opportunity for professional financial planners to show their skills”.

He identifies two types of drawdown client: client A who is very dependent on the pension income and client B who has other sources of income and is only partially dependent.

“Client A is likely to be in the majority and have a pension fund of up to £250,000,” he says. “Client B will be well-heeled and have a fund of £500,000 or more. Client B will be in a position to treat his or her fund as a normal investment portfolio, whereas client A will need to be a lot more cautious.”

He points to a “major difference” in the income strategy for each investor: with a drawdown account, the adviser is theoretically running the account down to zero over the client’s projected lifespan; with a ‘normal’ investment portfolio, the natural income can be taken with the aim of preserving or growing the capital.

In drawdown, a client should agree a prudent level of income and review it every three to six months depending on market volatility, he suggests.

“The adviser’s knowledge of drawdown in assessing how much capital as well as income can be released is crucial,” says Brian.

Ian McKenna, Director of Finance & Technology Research Centre, points to potential cost implications for clients who want to flex their income withdrawals regularly.

“It makes sense for clients to plan their income needs a few years in advance. Rearranging income needs on a regular basis is not going to be cost-effective for the client, who will need to pay the adviser for their time.”

Brian agrees, but only on the grounds of enabling advisers to do their jobs properly. “My reviews consist of a ten-minute phone call in most instances, just to stay in touch. Drawdown is not a bank account and any frequent changes to income would prevent the adviser doing his job effectively,” he says.

Platform choice

Advisers need to consider what processes they have in place to carry out the wishes of clients keen to take advantage of pension freedoms.

Tom Munro, Director of Falkirk-based Tom Munro Financial Solutions, believes the choice of platform is “crucial” for implementing and delivering a long-term retirement plan – “to build the required asset return rate and top-level asset allocation strategy”.

The ability to manage the client’s account with relative ease for changes to both investment strategy and income is also of prime importance.

Alistair Creevy, Managing Director of Independent Advisers (IA) Scotland, looks for a provider that “can offer complete flexibility – just like a bank account”.

Holly Mackay, Founder of Boring Money, who previously founded the platform research business known today as Platforum, urges advisers to watch out for three things – platforms that take ages to process sales and withdrawals; platforms with terrible cash rates (“though that’s pretty ubiquitous these days”); and platforms which charge a lot in ad-hoc and extra fees for withdrawals and one-off activities.

“People approaching retirement do want flexibility,” she adds. “Advisers have a huge role to play in helping clients navigate through this and a flexible drawdown platform will be a key ally.”

Audit trail

Platforms can also play an important role in helping to record activity. Not all platforms offer the kind of automated functionality which will help advisers produce the required audit trail simply, without reams of additional paperwork – paperwork that advisers may not have time for today, but which could be important evidence to support the advice given in the future.

Nick McBreen, an adviser at Cornwall-based Worldwide Financial Planning, says: “Where a platform can offer a good range of planning tools covering drawdown and portfolio planning, for example, then an adviser can work closely with clients to plan, maintain and review their income withdrawal strategy. Without such tools the task is pretty well impossible to do and document compliantly.”

Advisers must be careful, however, not to relinquish all responsibility for complaint record-keeping. “It’s really important for advisers to have independent systems to maintain their record-keeping of all the advice that has been given and all the necessary regulatory documentation,” says Ian.

“There’s significant risk for an adviser’s business if they’re [solely] relying on the platform to deliver such functionality.”

Digital world

While platform functionality is improving all the time, there is still much progress to be made.

Clive Waller, Managing Director at CWC Research, says: “Most advisers believe platforms have much greater functionality than they have. If they have large client portfolios and wish to carry out complex vertical and horizontal withdrawal down and across tax wrappers, they need to check that their platform can run the strategy. Most cannot.”
Platforms are also innovating to meet a clear desire among intermediaries to reduce paperwork.

“Speaking with advisers, they want to position all this stuff online, rather than complete paperwork,” says Alistair Wilson. “Platforms may all seem the same but they’re not; what can actually be done online and what requires paperwork remains an area of differentiation.

“The day needs to come when wet signatures are a thing of the past, so that the whole of our industry can fully embrace the digital world.”

Jennifer Hill is a former Deputy Money Editor of The Sunday Times, Personal Finance Correspondent of Reuters and Personal Finance Editor of The Scotsman.