Risk is the Elephant in the Room for the Retiring Baby Boomers, Says Sanlam’s Giles Cross. Why Won’t People Acknowledge That We’re Going To Need It?
I spend my life speaking with financial planners; about regulation, trends in the market, their service proposition and, most importantly, how they can best demonstrate and deliver value; how they can create the kind of “social currency” that attracts and retains the right kind of customers, those that refer and refer again.
Similarly, I’m spending an increased amount of time speaking to the end consumer, trying to ascertain precisely the triggers which motivate them to seek advice, to cut through the bluster and noise and to find someone to guide through the morass of often conflicting information that exists on the web, in the press and in everyday conversation; and in doing so I’m taking in their concerns and what they want to hear.
I could write chapters on what I’ve learned; chapters on what clients truly require from their advisers, the need for us to revisit the process of “fact finding” and re-arm ourselves with some of those “soft skills” so often ignored – and maybe even re-think how we discuss “goal planning” and its importance. Discussions for another day.
I’ve learned about the existence of a “communications gap”, a real disconnection between what we think our customers are interested in and what they really want to know.
Rose Tinted Scenario
But, most importantly, I’ve realised that if we fail to change the way we talk about two specific issues we run the run the risk of not only failing to capitalise on the greatest business opportunity of our time, but also failing a whole generation of investors.
We need to change the way we talk about retirement; and we need to change the way we talk about risk.
If demographic projections are to be believed, we are an ageing population. I read recently that by 2050, one in four people in the UK will be over the age of 65. That sounds OK until you realise that, of the other three, a large proportion will be in education or unable or unwilling to work; and that those who do will carry the burden not only of supporting themselves but also doing their part in delivering the tax receipts necessary to fund education, healthcare, welfare, defence et al.
If that is indeed in the future, how will the state also provide a universal old age pension? My belief is that it cannot.
As a society we have a rose tinted view of retirement – a fact that was brilliantly exposed by Martin Bamford in his recent film “Boom” (a piece I would urge all to watch – you can get it from https://vimeo.com/ondemand/boom). The film presents a view built on the retirement experience of our parents and grandparents; those generations lucky enough to have lived and worked during the era of defined benefits, an era now in its final death throes, a victim of merciless reality. Without care, our experience of retirement will be frighteningly different.
Making “It” Last
Since George Osborne announced his pensions shake up in 2014, there has been talk of the birth of a “new style” of retirement; not only of people retiring later but, more importantly, phasing their retirement through a movement to part time employment or taking another job in retirement to supplement income. Why? Because we simply haven’t saved enough. Pure and simple. In the euphoria of pre-crash consumerism, in the belief that the money would never dry up, we didn’t plan for the future.
But these “models” make huge assumptions. Who says we’ll all be able to work longer? Won’t our children and grandchildren, those, post education, who have a right to have dreams and ambitions of their own, have something to say about that? And to think that’ll we’ll all be able to get a part time job in our dotage is a little optimistic. Current experience should already put pay to that notion.
So, straight away, we have to start telling the truth about retirement; and it’s not pretty. I’m not suggesting for a moment that the adviser community starts spouting doom and gloom, scaring our audience into submission, but we do need to start telling it like it is; that auto-enrolment is a starting point and nothing more, that we’re not all going to be able to become “amateur landlords” going forward (and imagine the problems it would create if we tried!) and that if we are to stand a chance of making “it” last, we’re going to have to start treating our retirement saving as our number one priority.
Making “it” last. That’s going to be the challenge, and when we talk about “it” we shouldn’t think about money, we should think about lifestyle; the continuance of the ability to keep ones’ home, to run a car, enjoy a holiday and maybe go out a couple of times a month.
Retirement was never supposed to last 30 years or more – it was all supposed to be over quite quickly. And, if our reality is now that during our working lives we have to build a fund that can sustain a lifestyle for the long term, our challenge and opportunity is not only to advise, encourage and create effective long term investment programmes “pre-retirement” and “at retirement” but also “through retirement”.
In short, we need to create “whole life” investment strategies.
If we assume that drawdown will become the fashion and that annuities remain unfashionable, we will need our retirement funds to not only deliver sustainable income for the long term but also real growth. It is the only way to stop us running out of money.
Is De-Risking Defunct?
To that end, the traditional model of “de-risking” at retirement may be defunct. Rather than relying on a more defensive strategy in retirement to provide stability, the answer may be to remain invested in the equity markets, taking advantage of the opportunities offered there.
Providers now face the challenge of creating products which not only offer income and growth, but also give consumers the confidence to remain invested throughout their retirement. Indeed, at my organisation the focus is just that – we see it as the future.
Telling It Like It Is
Our role as advisers therefore must be to talk more honestly and positively about risk.
Risk seems to be something that many consumers simply don’t understand, and many advisers struggle to explain. Maybe it’s fear of regulation, maybe we are still too close to the financial crash, and maybe we don’t understand it ourselves. We must warn, quite rightly, about risk, but we must also talk equally about its benefits. We must learn to communicate the need for patience, explain market cycles and why the sustenance of a long term growth strategy, throughout life, is so important. If people are now to remain invested for 60 to 80 years, we must take a market view of the same period. Whilst past performance can never be used as a guide to future trends, if you had invested a £1 in 1945 it would now be worth… you know the story.
Over the longer term equity markets have always performed better than the mainstream alternatives – and, with that being the case, if we are now to remain invested for the longer term, it is those markets which may provide the solution.
People shouldn’t fear investment risk, they should understand it; and alongside the need for clear, no nonsense communication about the importance of retirement planning, we must ensure that they do.
That’s where we can deliver real value.
And as for the providers, watch this space…