Leading the horse to water

"We need to describe our services in terms that relate to their lifetime goals. A client acquired on retirement will be in need of our services for 20 years on average."

To me the transition into retirement is the biggest financial change most people will go through. Also it is one of the most dangerous as some of the decisions are irreversible.

For example, joining a workplace pension for many is a no brainer. If you don’t, you are effectively giving up part of your salary by way of forfeiting the employer contribution that would accompany it. If you don’t have access to a workplace pension, saving into an ISA or a pension are decisions that can be easily modified or improved upon if events overtake the rationale for the original decision, or better solutions become apparent.

Similarly, buying the wrong house can be remedied, although some financial loss may be incurred. Also, a better mortgage arrangement can be entered into at the end of any lock-in period.

Most people when they enter retirement give up a regular income in return for drawing down on their accumulated wealth. Nearly all will receive a regular income in the form of the State pension.

This however is unlikely to be sufficient to replace the employment income they are losing. Some may be fortunate in having access to defined benefit pension income, others may have to consider using an annuity to supplement their State pension; otherwise they will need to use income drawdown with its inherent risks.

The vast majority of those retiring need help to enable them to draw their pension income in a way that will satisfy their retirement aspirations. Many of those will have to call upon non-pension wealth, e.g. housing wealth to be able to have the retirement they are looking for.

These are the very people that need help. According to the FCA Retirement Income Review only 10% of those who accessed their defined contribution pensions in the third quarter of 2016 went on to make an appointment with PensionsWise. Many, who are in need of assistance with their decision making, are not seeking out the free services available to them. Those services however are restricted to only their pension options.

The Financial Advice Market Review has looked at a number of initiatives that will reduce the cost of financial advice and make it more accessible. The saying is that, ‘You can lead the horse to the water but you can’t make it drink’. FAMR initiatives should make the water more palatable so there could be an increase in the numbers that drink the financial advice water. We still however need to get the horse to the water.

The current ‘wake-up’ process directs people to PensionsWise. Since launch the PensionsWise website has had over five million visits. That appears to be working even if they are not progressing beyond the website.

The FCA report is full of examples where those who took positive actions are more likely to have been advised than those in a similar position who did not. However, wake-up packs also direct individuals to seeking financial advice that does not appear to be working and a PensionsWise interview will end up with a recommendation to seek advice where it is appropriate.

So how do we get the people to the water?

During their accumulation phase, many will have received financial help when taking out mortgages, life assurance, bank loans, or when setting up their pension account through the workplace. I believe it is here the retirement financial journey begins if we are going to get people to readily seek help with the most important transformation in their lives, moving into retirement. We need to maintain contact and encourage them to return.

There are some major obstacles to overcome and questions to be answered though. For instance, what is the impression that is left with the client? Is this the person or firm they would return to with the next big financial decision on their life journey? Could we facilitate helping with whatever that decision would be? Next there is cost. Have we helped the client understand the value of the help we have provided?

This leads onto the third main barrier to using a financial adviser in that they many do not understand what a financial adviser can do for them. This needs to be explained in terms which are relevant to them. We advise on mortgages, life assurance, estate planning, wealth management, pensions and retirement income. To the 50% who will not use a financial adviser what do these terms mean to their lives?

We need to describe our services in terms that relate to their lifetime goals. A client acquired on retirement will be in need of our services for 20 years on average. During that period, they may create additional assets through downsizing; may inherit additional assets, may need advice on equity release, or may need to realign their assets to fund their care. What’s more they will introduce us to younger generations who also need our help and assistance.

The challenge is how do we provide the services our customers need so that it becomes natural behaviour to go to the water we provide and drink?