5 min read 4 Jun 21
In an uncertain environment, financial advice firms are discovering the value of introducing more predictability to their retirement-planning process.
In a market crisis, the true value of financial-planning principles is often put sharply to the test. First and foremost, the focus on goals will protect most clients from an emotional reaction that could be detrimental to long term financial security. Second, has the portfolio performed as expected?
The Covid-19 pandemic has certainly been an opportunity to assess the value of a robust retirement-planning process. And the signs are that more and more advisers are now looking to make their approach to retirement advice more process-driven.
According to the 2021 Centralised Retirement Propositions Study, that we conducted for M&G Wealth, nearly half (49%) of advice firms now take a centrally-agreed approach to retirement planning for their clients. A further fifth (20%) of firms intend to introduce a centralised retirement proposition, or CRP, in the next 12 months.
That’s over two-thirds of advice firms looking to standardise and centralise their retirement-planning process, which is pretty remarkable (and the numbers are even higher among larger firms). But there again, the study also shows that 60% of advised clients are in or phasing into retirement and 62% of advised assets are linked to retirement advice. So, a retirement-planning advice approach that’s consistent for every client, and can be scaled up for a growing bank of retirement assets, is perhaps becoming much more necessary – both commercially and from a regulatory standpoint.
What’s interesting is what firms are choosing to centralise. According to the research for M&G Wealth, the most common features of a CRP are standardised cashflow modelling to estimate each client’s income needs year on year (featured by 54% of firms in their CRP). Next is a firm-wide attitude to risk questionnaire for retirees (featured in 47% of firm CRPs) and a specific standardised tool to assess a retiree’s capacity for loss (33% of CRPs).
Scenario analysis tools to assess outcomes based on different market conditions and ONS life expectancy data are used by over a third of firms but are so far used on a more ad-hoc basis. Currently they feature in only a fifth of CRPs.
In a low interest-rate world, the need for robust cashflow modelling to determine an appropriate and sustainable level of client income is understandable. The volatility and dividend cuts of the past year have no doubt heightened this need.
Indeed, close to a quarter of advice firms (22%) reported introducing cashflow modelling tools over the course of 2020. Over three-quarters of firms (77%) with a CRP have imposed a consistent strategy to assessing the suitability of withdrawals. The percentage of CRPs using guardrails (structured adjustments to withdrawals to prevent over- or under-spending) has also doubled year on year – albeit from a low base – from 4% to 9%.
This standardised approach to issues such as cashflow and income withdrawals is primarily seen by firms as beneficial to clients themselves. But 20% of firms see it as a means to improve their own business efficiency, 18% see it primarily as a means to help meet regulatory requirements and 14% see its greatest benefit as a way to reduce risk in their business.
Managing risk and unintended consequences seems to be key to the adoption of CRPs. As one adviser commented in our research: “This year we’ve gone for a standardised approach to the cash buffer. Different advisers were having different conversations and we realised we needed a matrix. ‘If the client has this, then this is what we need to do.’” Over the coming year, the same firm also plans to roll out a centralised withdrawal strategy, including a withdrawal policy statement that clients will have to sign.
The value of a centralised approach to retirement planning, particularly in the current uncharted post-pandemic environment, looks set to keep growing. The director of one firm that provides outsourced paraplanning services to financial advice firms told us: “One outcome of Covid is people have become a lot more process-driven; a lot more focused on delivering things consistently. Maybe, irony of ironies, the financial planning outcomes are probably going to be better because of Covid – because people are now having to think about the process.”
The bigger a firm is, the more likely it is to have a CRP in place: 54% of firms with five or more client-facing advisers have one compared to 40% of sole traders, for example. But firms seem to be keen to ensure that a centralised process doesn’t mean straight-jacketing advisers, or clients, into a one-size-fits-all solution. Only 15% advisers at firms with a CRP say they never go outside its scope and close to 30% say they look at bespoke solutions for clients at least once a month. That said, the burden of proof is put on the individual adviser to explain their reasons for wanting to go outside the CRP recommendations – particularly among larger firms.
But what might be of most interest post-Covid is that it’s not just firms that are potentially finding reassurance in CRPs.
Our research for M&G Wealth indicates that firms with a CRP in place were more likely to say they gained more clients than usual in 2020 (13%), compared to those without a CRP (4%). In other words, firms with more robust processes may be more appealing to prospective clients and may have more bandwidth to focus on customer acquisition.
In a highly uncertain world, being able to offer an element of predictability and clear process to retirees may be proving to be a powerful weapon in a firm’s armoury.
This article first appeared in New Model Adviser.
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