COVID-19 – advising through the storm

6 April 2020

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Financial markets across the globe remain incredibly volatile as the Covid-19 pandemic continues to unfold and it’s difficult to predict how this will play out over the coming months.

The global economy is now in recession and this can be extremely unsettling for clients at different stages in their retirement journey.

Clients are likely to see the value of their pension investments go up and down in the coming weeks and months and you’re bound to be getting lots of questions from worried individuals.

Here we share some tips to think about when speaking to certain groups of your clients. We’ve highlighted three tips each for three broad groups: 

  • Regular savers in the accumulation phase of pension saving
  • Clients approaching a retirement
  • Clients in drawdown and taking a regular income

Regular savers in the accumulation phase of pension saving

1. Highlight the mantra that pensions are a long-term game

We all know that a pension investment is for the long-term but some clients may lose sight of this amongst the various news flows. Remind your clients that long-term history has shown that eventually markets do recover. You can use examples such as the Global Financial Crisis and Black Monday to highlight this point. It took markets 1022 trading days to recover from the Global Financial Crisis but over the long-term being invested in the stock market does provide the opportunity for growth.

2. Encourage clients to take advantage of market dips

Whilst clients are busy digesting all the headlines about global stock markets plummeting, some may feel tempted to move their money into cash or suspend payments into their pension altogether. It’s important to highlight the benefit of investing more now to benefit from compounding over the long-term. Remember that the golden rule of investing is there is only one rule and that is ‘buy low’.

Clients in the accumulation phase can have many years left before retirement and although the idea of remaining invested may be a scary thought for some, remind them that they can potentially benefit from buying the lows and capitalise when markets do eventually go back up.

3. Refrain from making knee-jerk reactions to your clients’ plans

Just like your clients, it’s important that you too keep a calm head throughout this situation and don’t make any unnecessary reactions to the robust plans you’ve put in place for your clients. Remember that market shocks are to be expected every once in a while and are all part of the journey. There can only be one winner when trying to time the market.

It might make sense to review the robustness of your investment choices and carry out some additional due diligence, but now is not the time to make sweeping changes to plans you have spent a lot of time putting in place. Ensure that your investment process is robust and strong governance is in place to ensure it continues to meet its objectives.

Clients approaching retirement

1. Remind clients they don’t need 100% of their pot immediately

There’s no doubt that the market volatility is a significant issue for those clients looking to retire shortly. This can be exacerbated if clients want to move their assets into cash and effectively crystallise their losses.

One of the simplest messages to relay to clients in this situation is a reminder that they’re very unlikely to need 100% of their pension pot as soon as they retire. It might not feel that clients in this category are playing the long-term game, but they are to an extent still long-term investors. And that means the benefits of buying market dips are just as relevant as other client groups.

2. Emphasise the importance of your clients’ existing plans

You’ve already put plenty of work in to ensure your clients have in a plan in place which not only meets their individual needs but is thoroughly robust. This is a major advantage for advised clients over those individuals who are in the same position but scrambling for advice. This should be at the forefront of your client conversations.

3. Stress the need for flexibility

It goes without saying that the market turbulence may trigger some unsavoury client outcomes. The stock market falls mean that some clients may not be able to retire as quickly as they’d like. I’m sure a lot of clients won’t like this message but highlighting the need for additional flexibility may be valued over the longer-term.

Clients in drawdown and taking a regular income

1. Review your clients’ income sustainability

As markets swing on a daily basis, the impact of sequencing risk and volatility drag for those clients taking a regular income is huge. This can have a significant impact not only on the capital generated to date but also on a client’s ability to generate further income.

It also highlights that when clients transition to taking money out of their pension it’s not just a question about how their investments perform, it’s also a question about when their investments perform.

As we know, there is no magic number when it comes to income withdrawal rates. Income sustainability depends upon a number of factors such as term, investment, charges and the level of income a client requires. Make sure you have a robust process in place to review your clients’ income sustainability.

2. Encourage income flexibility

It’s a sensible move to limit the amount of income being withdrawn during periods of market stress. In addition to income being reduced, don’t be afraid to discuss expenditure with your clients. Reducing current and expected levels of expenditure can improve income sustainability over the longer-term.

If current and future income requirements have actually increased, have a discussion with the client and review their plan to determine whether they can take additional risk to achieve a more sustainable level of income.

3. Time to consider a centralised retirement proposition (CRP) approach?

The argument for adopting a centralised investment proposition (CIP) approach has been well documented and this approach has helped advisers deliver some excellent client outcomes in the accumulation phase. However, the CIP model can be slightly limited once clients are withdrawing money as the overall process doesn’t focus on things like capacity for loss, spending habits, sequencing risk and the sustainability of income withdrawals.

Using a CRP shows you’ve recognised the different approach required for clients in accumulation versus drawdown. Like a CIP, they can be used to deliver a consistent and structured approach but with a particular focus on clients’ different needs in this phase. This is achieved through the use of an investment solution and product which is specifically designed for income withdrawals and of course, the use of associated planning tools focussed on income sustainability and sequencing risk.

The use of CRPs is particularly relevant in a post PROD regulatory world where you’re required to prove the products you recommend deliver good client outcomes for your various target markets.

The value of financial advice

With all the media noise and the impact this pandemic is having on our daily lives, it can be hard to focus on the positives. But the world will defeat this virus. Investments will rise again and so will the perceived value of financial advice.

To emphasise this point, we recently worked with the International Longevity Centre to put a number on how much financial advice is worth to those who receive it. The results were startling with those who took financial advice being on average £47,706 better off than those who didn’t. This is split between a £30,991 boost in pension wealth and an increase of £16,715 in other financial assets.

This research powerfully demonstrates the enormous impact taking financial advice can have on people and in the midst of the current crisis that cannot be underscored enough.

About the author

Ryan Medlock

Senior Investment Development & Technical Manager

Ryan’s journey with Royal London began back in 2008 after starting his career in compliance with Norwich Union. As an Investment Proposition Manager, Ryan contributed to the growth and development of Royal London’s Governed Range before moving to Aberdeen Standard Investments for a stint in the Strategic Client’s relationship team. Ryan returned to Royal London in 2018 with a focus on exploring adviser angles amongst complex regulation and investment themes. Ryan is involved in developing adviser facing content, presenting, writing articles and commenting for the press. Ryan holds the IMC qualification. Ryan is particularly proud of the fact that he finished 952nd in the 2008/09 edition of Fantasy Premier League.

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.