Advisers have a better chance than any other part of the industry of talking policyholders out of bad decisions, but as Phil Young argues, we can’t solve these broad problems alone.
Two of the biggest long-term financial, economic and social problems the UK faces are zero real-returns on lower volatility savings, and managing money in retirement. It’s not unreasonable to expect the financial services industry to chip in to help. It is unrealistic to expect advisers to bear the burden of responsibility for solving these problems, and take the blame when things go wrong.
Here’s two examples to illustrate my point.
Example 1: client portfolios
In theory a significant percentage of an adviser’s client bank should be in a portfolio mis-aligned to their attitude to risk. For clients with a long term saving and investment objective, there is no chance of them hitting their goals without significant exposure to more volatile equity markets and the type of risk to capital this brings. I looked at some risk profiling statistics and mapped strategic asset allocations and the number could be around 50% of long term investors. If we prioritise the risk of achieving investment objectives above the experience of volatility along the way, the client’s attitude to risk is of secondary importance. That’s not to say it’s unimportant as an indicator of how a client will react to risk and volatility. Here, the job of the adviser is to coach clients to accept an investment journey that is more uncomfortable and turbulent than they would like, to achieve their long-term aim. The FCA have suggested this also, stating there is a need for some consumers to accept more volatility.
This doesn’t mean it won’t prompt complaints, and for those seeking income in retirement sequence risk poses an added problem. With the best will in the world, it can be a tricky situation to manage, and the easy option is to kick the problem 20 years down the line (well past many advisers’ retirement dates) and stick to using poorly performing, expensive, low volatility portfolios which don’t hit performance objectives but create fewer short-term problems, i.e. complaints, than taking on more investment ‘risk’. In my experience, most advisers don’t want to take on more risk in their business by putting more risk into client portfolios, although I accept a number do take this approach. Few advisers nowadays deal with clients in the early phase of saving where volatility is less relevant.
Example 2: pension freedoms
Pension freedoms (cynicism put to one side) started out life as a way of devolving responsibility from Government to individuals for looking after their money in retirement. The burden of responsibility for consumer protection then quickly shifted to the FCA, to providers and advisers. Most advisers want nothing to do with it, although a few want to capitalise on it. The situation is worse for pension transfers, which are now on the increase. There needs to be some comfort given to providers to allow them to process business in a consistent and sensible way without the need for advice in every case but with some standard way of providing warnings. There also has to be some comfort given to advisers that there is a way of advising properly on the issue without the presumption of guilt. And there is definitely a big job to be done to convince PI insurers to provide cover for it. We’ve started this process and it’s clear that a lot of thinking is informed by misconceptions and misleading information about what’s currently happening.
Neither of these problems were created by advisers, but there are too many calls for them to solve them alone or completely walk away from them. It might even be right that we shouldn’t look towards advisers at all for the answers. Rather than the deployment of expensive resources in a piecemeal fashion, such as Money Advice Service, Pension Wise, Project Innovate, multiple regulatory, trade and professional bodies etc, there needs to be a concerted effort to look at the root cause of the problem and develop a comprehensive solution, rather than pass the buck. Advisers have a better chance than any other part of the industry of talking policyholders out of bad decisions, but can’t solve these broad problems alone. Many advisers now acknowledge that the answer to the problem is not always advice.