Paying for advisers?

"If commission did not exist and the client had to pay the adviser for the services provided, what would be the customer expectations? "

A few days previous I read an article proposing that mortgage providers should be paying trial commission to mortgage advisers. One of the Royal Commission recommendations is to ban such trial commission in Australia.

Another recent article that caught my eye was about those mortgage advisers who are avoiding the retirement interest-only market because they do not fully understand the product or the market. They are, in my view, being honest with their customers. Yet, somewhat conversely, there are those who advise on this product without an understanding of equity release. Is this similar to what the Australian Royal Commission found - clients paying for a service they don’t receive?

If commission did not exist and the client had to pay the adviser for the services provided, what would be the customer expectations? Before the product recommendation, the customer would expect a justification that there were no alternative courses of action or product types that could provide a more suitable solution for them.

Retirement markets are complex. Someone who has retired is the mirror opposite of someone who is working. Following the pension freedom reforms an increasing number will have no guaranteed regular income other than their State pension. However, they could have significant sums at their disposal.

Drawing income from an invested portfolio introduces different risks to those experienced while accumulating wealth. Pound cost averaging becomes pound cost ravaging.

What is the reason the client is turning to their housing wealth in retirement? Is it to reduce their overall wealth for tax reasons? Is it because they have insufficient retirement savings and they need to augment them? Is it because they are unable to repay their debts or a mortgage?

The solution will depend upon the objectives of the consumer, their personal circumstances; the wealth they have and where and how it is held. There is a danger that we look for solutions from our viewpoint. We need to undertake a 360-degree examination of all the options to come up with the best solution for the client in front of us. Before we do, we need to understand why retirement is complicated.

While working, an individual is looking to house their family, protect them from the risks that could prevent their income from continuing and to build wealth for their retirement. Let us not be too serious and insist they spend all their income on financial products, they also need to enjoy life. It’s good for their health and well-being.

When retirement comes along, hopefully they have a home, rented or owned, and they want to use the wealth they have accumulated, no matter how large or small to enjoy the fruits of their labours. However, this does not come without risks which they need to understand how to manage. They therefore need a flexible plan. I say flexible because it may have to last 20, 30 or even 40 years as life does not stop when you reach retirement age.

To develop that plan, needs a lot of personal information. There is no one-size fits all solution. An analogy can be made with a new kitchen. The customer has an idea of what they want, but a good kitchen designer shows them how so much more is possible. Once agreed products need to be sourced to deliver the plan.

Because of its complexities, will the retirement market eventually morph into two different services? Holistic planning and review, and product sourcing and review, each paid for separately.

The reason I believe this is a possibility is that products that derive from different financial disciplines have to interact in a retirement plan that uses both pension and housing wealth. We know this is going to be the case for a large number of retirees.

Housing wealth can generally be accessed through the use of mortgages including equity release and downsizing. If mortgages are to be used should pension withdrawals be accelerated in the knowledge that when pension funds have expired, the mortgage funds will be available to fund the remaining years?

On the other hand, if downsizing is to be used should the sums realised be used to fund the early years of retirement before calling in pension savings? Should the excess proceeds be placed into tax-advantaged investment wrappers, pensions and ISAs, as fast as possible? The expected duration of the realised downsizing assets should impact on investment decisions made about the pension savings.

The retirement income market is evolving fast. More should be seeking advice than they do. If the market evolves as I have described, the client will pay for the service they want. Technology will develop to support each of the services provided.

There are many hurdles to the market evolving in this way. In my view the retirement income market is in its infancy and has a long way to go before it reaches maturity.