Taking us under the hood of LV’s unique research programme, Gwen Haggo, Savings and Retirement Sales Director at LV=, explains how financial advisers can fine-tune their offer to clients amid demanding market factors.
In recent years, the UK’s Financial Conduct Authority (FCA) has increasingly sought to champion positive outcomes for consumers.
This change provides the backdrop to the introduction of Consumer Duty in July 2023, as well as the FCA’s Thematic Review of Retirement Income Advice, published in March 2024, both of which require advisers to continuously evaluate both the appropriateness and fair value of the products they recommend as market conditions and client circumstances change.
There’s more expectation than ever before on financial advisers to strike the balance between cost and quality in their offer to clients in or approaching retirement.
Here’s how advisers can balance these two factors successfully to ensure they’re always recommending the right products, to the right clients at the right time.
Assessing client-specific needs
Every client has unique financial goals, risk tolerances and time horizons. Effectively managing these individual needs becomes particularly important for those leading up to and into retirement when the cash-flow planning decisions they make could have a major impact on their client’s future quality of life.
Achieving less volatile and consistent returns are crucially important. LV’s Wealth and Wellbeing Research Programme* has recently highlighted that three in five defined contribution or personal pension holders would prefer for their pensions not to fluctuate too much but still grow faster than inflation. This is particularly true of women over men (63% vs. 59% respectively) and significantly more so for the older generation (71% aged 55-64 vs. 52% aged 18-34).
At the same time, ease of access to portfolios, and the transparency of ongoing charges are both seen as critical for maintaining a successful adviser-client relationship.
One option to achieve this is through online platforms, which can provide a simple and seamless multi-tax wrapper service at the click of a button.
To satisfy those clients with more complex needs or a lower risk tolerance, sometimes an alternative, high-quality product with slightly higher, but still fair overall costs, may be more appropriate.
For example, our Smoothed Managed Fund range and products/wrappers can offer clients emotional assurance through a smoother investment journey — an important consideration for an ever-increasing percentage of clients who are becoming more risk-averse the closer they get to decumulation.
Cost impact on returns for adviser and client
Overall cost is, however, a critical factor that can significantly impact both the adviser and the client’s returns.
A combination of costs, including management fees, transaction fees, and advisory costs, have the potential to erode investment returns.
LV’s Wealth and Wellbeing research has also found that in today’s economic climate, where the cost of living is a significant concern, people are increasingly hesitant to consider pensions and investment products (24% of the total population and 18% of those in work) because they’re worried about their finances in the short term.
Advisers must respond by scrutinising all fees across the complete customer journey, associated with the advice they give, and the products they recommend, providing clear justifications for any costs and overall fair value.
While low-cost doesn’t necessarily mean low quality, advisers should assess the client’s individual circumstances to determine the most suitable product, or products, that can offer both fair value and the potential for positive customer outcomes.
Quality of investment products and services
When evaluating investment products, the performance and ethos of fund managers play a crucial role. The debate between active and passive investment strategies continues to shape the industry, with cost sensitivity continuing to drive a general trend toward passive investments.
However, research has found that while cost is a major factor, a large proportion of advisers still prefer active strategies due to the potential for higher returns and better alignment with specific client goals. Hence, it remains at the discretion of the adviser to choose which is more appropriate depending on the needs of each individual client.
Risk management is another essential aspect in evaluating investment products. Blending different products, such as combining a smoothed fund with passive investments, could reduce overall portfolio volatility while continuing to manage costs effectively.
Additionally, tax considerations should not be overlooked, and advisers should explore tax-efficient wrappers to potentially enhance client returns.
A multi-tax wrapper approach for the client can enable you to meet the need for certainty of income and also help to de-risk short, medium and long-term volatility, whilst achieving as much tax-free income each year as possible.
Final thoughts
In an environment where the FCA’s Consumer Duty and Thematic Review on Retirement Income continue to set understandably high standards, financial advisers must continue to diligently balance the suitability of products with the specific needs of their clients.
Above all, ensuring that the client’s best interests remain at the forefront of every recommendation is paramount to achieving successful and fair outcomes.
