3 min read 20 May 22
Market returns and soaring inflation are among the biggest challenges to withdrawal strategies being used as part of Centralised Retirement Propositions (CRP), according to our new research, conducted for us by NextWealth.
Almost nine in ten (87%) advisers cited market returns as being - to a great or some extent – a key challenge. Of which a just under a third (32%) admitted it was to a great extent. Recent market volatility and expected lower returns in the coming months and possibly years has increased risk for some retirees that they will run out of money.
The research, conducted among 200 advisers, also found that inflation is a key concern with 87% of advisers stating that it’s – to a great or some extent – a challenge.
Portfolio size/size of accumulated assets, low risk profile of clients, balancing income needs against sustainable investing preferences, and dividend/natural income also made the list.
Among the most widely used components of a CRP is a strategy to determine sustainability of withdrawal rates. 79% of financial advisers working in firms with a CRP said this is included as part of the CRP. A further 41% said the CRP includes an approach to dealing with sequencing risk.
Amongst the strategies used to determine suitable withdrawal rates for clients in drawdown included in CRP, 35% stated that they use a fixed rate or range (e.g. the 4% rule), followed closely by 32% who use a modelling tool (e.g. Timeline). 10% said they assess based on the annuity rates, whereas 8% recommend clients only take portfolio income and only 6% use GAD rates.
The research also explored the type of tools advisers are using. Attitude to Risk (ATR) questionnaires are widely used by financial advisers for virtually all their clients. 86% of advisers use them for all their clients and a further 13% use them for retirement advice clients, totalling 99% of advisers who use ATR questionnaires in some capacity. Cash flow modelling to estimate client income needs year on year is also used by 88% of advisers. 84% use tools to access capacity for loss, whilst scenario analysis (e.g. using stochastic or other models) is used by 73% of advisers. Almost two in three (65%) advisers use tax optimisation tools.
At the other end of the scale just two in five (39%) advisers say they use underwriting services to access clients’ life expectancy, of which just 18% use them with all clients. One in five (21%) use them with retirement advice clients only. 61% of advisers do not use them within the business. Less than a third (32%) use heredity modelling using parent or a relative’s age of death, of which 17% use them with all clients, and 15% use them with their retirement advice clients. More than two in three (68%) advisers do not use this modelling tool within their business.
“Over the three years of this survey, we have seen firms adopt standard processes and approaches to defining a safe withdrawal rate and increase use of tools to support planning decisions. We have also seen an increase in adoption of centralised retirement propositions, to bring consistency to approaches, particularly in larger firms.
“Importantly, the CRP is a framework within which to deliver retirement advice. Financial advisers report that they are now more likely to go outside that framework, as they continue to deliver a bespoke service to clients. The CRP provides a set of guidelines, but individual clients may need different products or approaches.
“Helping individuals generate a sustainable and reliable retirement income has always required a special set of advisory skills. But the current climate has taken the challenges facing retirees, and their advisers, to an intensity that hasn’t been experienced for 30 years. Widespread geo-political tension, ensuing market volatility, and the spectre of double-digit inflation have made expert retirement advice more valuable than ever. But the task facing advisers can equally feel more daunting. That’s why we work alongside advisers and their clients to help them achieve their financial goals and objectives for their retirement.”
"Our research for M&G Wealth shows that CRPs are growing in popularity with advisers year on year, particularly for larger firms. This is no doubt because CRPs offer structure and processes that ensure clients of multiple advisers within a firm receive advice in line with the firms’ best practice policies. This not only reduces risk for firms, it also ensures all clients are equal in terms of the level of service and advice they receive."
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