14 Jan 2025
This trio might make one think of the national motto of France – liberty, equality, fraternity – which is thought to have come from the French revolution. It’s probably pushing it to say that the Financial Conduct Authority (FCA) is looking for a revolution in retirement advice, but these three words may be useful at summing up what a successful retirement advice business needs to deliver over the coming years.
Time to act
The long-delayed thematic review of retirement income advice was finally published in March 2024. It found that firms had a way to go to meet the regulator’s expectations in this hugely important and incredibly complex market. The review and accompanying ‘Dear CEO’ letter spelt out in detail what firms needed to look at to improve their advice approach.
While the FCA called for firms to act, it gave no explicit deadline, and said only that it would be conducting further supervisory work in this area. But it would be unwise to think this lack of deadline equates to a lack of urgency. The FCA made retirement income advice a priority in its October 2024 ‘portfolio letter’ detailing its areas of focus for the advice sector over the next two years and has promised further commentary early in 2025.
In our recent research report “Retirement Advice in the UK: Time for change?”1 produced with NextWealth, we find many firms have started to adapt their retirement advice approach in response to the FCA’s review. Yet the research also suggests some have yet to consider the review in detail or may have not fully appreciated its implications. Coupled with a promise of a more data-driven approach from the FCA which is set to cast the net of supervision more widely, firms will need to act urgently to make sure they meet evolving regulatory expectations.
Demonstrating suitability
The FCA review details several areas from risk profiling to setting withdrawal rates where firms need to examine their approach. The overarching message is that retirement income clients are different from those accumulating wealth and firms need to recognise these differences when considering the suitability of their advice.
At the heart of this is the idea that the risks facing clients in retirement are different from those accumulating wealth. For example, retirement clients face longevity risk (the risk of not knowing how long we’ll live) and sequence of returns risk (the risk that a loss, particularly early in retirement, will reduce the sustainability of income). Our research found that three quarters of firms currently use or intend to use a different approach to assessing risk in retirement. However, 24% say they have no immediate plans to do so. Perhaps this is because they feel a single approach can cover risks faced in accumulation and decumulation, but it may also be some have yet to recognise there is a difference.
The FCA review questioned the use of fixed rates to determine sustainable withdrawal rates, such as the infamous 4% rule2. While perhaps not a bad rule of thumb, fixed rates don’t recognise the client’s individual circumstances such as age, risk appetite or capacity for loss. Our research shows that the use of fixed rates has come down significantly in the past few years but 27% of advisers told us they still use a fixed rate or range all or most of the time.
The research was conducted six months after the FCA review was published so perhaps firms hadn’t yet had time to move away from fixed rates. But when we asked how their approach was likely to change over the next 12 months, 21% of advisers said they will use fixed rates more frequently. Again, this is unlikely to be a snub to the FCA, but rather an indication that some firms have yet to get to grips with the review.
Demonstrating suitability requires not just understanding the different characteristics of retirement income clients but showing that the products and services provided are specifically suitable given those characteristics. This doesn’t necessarily mean using different solutions or approaches for decumulation from those used in accumulation, but firms may be challenged to show a different approach isn’t needed given the regulator’s stance.
Maintaining consistency while tailoring advice
In our research, we asked firms whether they operated a common and consistent approach to delivering decumulation advice that is distinct from the advice model followed for clients in accumulation. This distinct approach is sometimes referred to as a Centralised Retirement Proposition (CRP). 38% of respondents told us they had been doing this for 12 months or more, 14% had introduced it in the past 12 months and 20% intended to do so in the next 12 months. When asked what motivated them to do this, the main reason for the two latter groups was that the regulator expected it.
While the regulator does not explicitly require firms to use a CRP, it does seem to value the consistency it brings. The FCA has noted a CRP can “help different advisers within a firm give advice to different customers in a consistent way”. It is perhaps surprising then that 28% of firms said they had no plans to introduce such a common and consistent approach.
The main reason for this, cited by 84% of this group, is that they prefer to tailor advice to each client individually. This is understandable, and exactly what the regulator expects firms to be doing to demonstrate suitability. But it fails to recognise the need for, or benefits of, more consistent tailoring.
Ensuring that a client gets similar advice when seeing Adviser B to that prescribed by Adviser A within the same firm allows suitability to be managed more efficiently and clearly reduces risk for the firm. Achieving this is not easy though. Building an approach that is flexible enough to cater for the wide variety of client circumstances while being sufficiently directive to ensure consistency is no mean feat.
The Verve Group3 refers to using a CRP to define the broad approach rather than trying to define a specific proposition for all client types. This involves having an agreed playbook that deals with subjects such as how risk is profiled and capacity for loss calculated, when and how cashflow planning is used, and the circumstances where guaranteed income may be employed.
Building scalability
Our research found that retirement advice represents the largest part of firms’ business, and accounts for 57% of assets under advice. Moreover, firms expect this to increase to over 60% over the next three years, driven by a range of factors, the most notable being changes to tax rules. The change to the tax treatment of pensions on death made in the recent Budget was viewed as affecting the largest number of retirement clients compared to other measures the Chancellor did or could have announced, this suggests it could drive significant demand for retirement advice.
Although advisers are generally positive about the potential demand for retirement advice, they also cited constraints in their ability to meet that demand. The most notable challenge was the impact of regulation on the time taken to deliver advice, cited as a negative by 48% of advisers. Allied to this, 41% felt they would be negatively impacted by adviser and paraplanner productivity.
Achieving consistency of advice be it using a CRP or other approach can clearly help improve efficiency within firms. Greater use of technology can embed consistency and drive productivity as well as improve record keeping, another key focus of the FCA’s review. We found that most firms were looking to increase their use of tools across cashflow planning and modelling, with 40% expecting to increase the use of risk profiling tools. Yet what is really needed is a technology stack that is integrated across the advice journey ensuring consistency of data and assumptions throughout the process. Only then can firms really drive productivity improvements and the scalability needed to meet the ever-increasing demand for their services.
For more information and download the Retirement Advice in the UK: Time for Change report visit the research page here
1Research conducted by NextWealth for BNY Investments including: An online survey of 208 financial advisers run from 9 September 2024 to 21 September 2024; an online survey of 254 retirement advice consumers run from 9 September 2024 to 21 September 2024; and qualitative interviews with ten financial advice professionals conducted between October 2024 and November 2024.
2US financial planner, William P Bengen, is credited with developing the 4% rule. This states that withdrawing 4% initially from a pension pot and increasing this each year by the rate of inflation means there is little likelihood of running out of money during a 30-year period.
3The Verve Group provides support services to financial adviser firms. Source: The Verve Group, Talk in Demand Retirememt Podcast https://www.youtube.com/watch?v=cWYwymUbWj4&utm_content=183309498&utm_medium=social&utm_source=linkedin&hss_channel=lcp-19011166