Well we’re here in advance of the Great Pension Debate in the Aberavon Beach Hotel in Port Talbot, in a couple of hours, I’ll be introducing Paul Lewis, Jo Cumbo and the brilliant IFAs who will be focussing our minds over the next two days. But the first voice as I reached the hotel in the early hours was that of Al Rush- for whom no praise is too high.
I guess that I am here to challenge some of the orthodoxies of financial services. Last night I challenged the idea that things would be alright because of advice, or robo-advice or a list of options. You can read my blog about lazy thinking here. I’m sorry to kick a fellow consultant in the goolies, but you can read the complacent tosh from KPMG that inspired me here.
Access to advice may well become the norm. Employers may be able to build gateways to advisory networks like St James’ Place but that does not solve the problems that people have when exchanging a wage for life for the uncertainties of drawdown. In my blog I spoke about the twin ills of early spending and financial constipation. Getting drawdown right has been described as the hardest, nastiest problem in finance and I’ll pick up where I left off, by challenging financial advisers about succession.
Most IFAs know that the value of their business is based on other people’s money, most typically the money they manage for their clients to and through retirement.
What is less often discussed , is the trust placed in IFAs by their clients to manage their money not just for the time they are in practice, but till the money runs out or is passed to another generation.
The consumption rates of much retirement money is , according to Paul Johnson and the IFS, much lower than might be expected simply to provide a wage for life. For whatever reason , most wealth is being managed for posterity.
However the advice is person to person and most people advising will not outlast their clients. At some stage they must plan for the succession not just of their business, but of the management of their client’s financial affairs.
I wonder how many financial advisers consider continuity as a major risk in managing their client’s affairs.
The personal relationship between an adviser and his/her client is often cited as the main advantage of face to face over robo-advice. This relationship is broken when an IFA retires or dies or simply re-allocates his clients within his firm or across firms.
The break of the personal links is in radical contrast to the way that money is managed within an occupational pension, where stewardship is from trustees who manage money impersonally but with definite targets – the payment of the last pension payment being the most obvious.
The process of infinite renewal, which is at the heart of DB strategy, depends of course on schemes remaining open. As I have written several times, the closure of DB schemes (indeed any kind of funded collective scheme) triggers particular problems akin to those which people face in drawdown. The last person standing in a closing collective scheme is either hoarding or over-spending. The point of keeping a scheme open is that there will always be someone coming along behind. The maintenance of an open DB plan is its succession strategy. Continuity is achieved by the management of money with longer term goals in mind than the payment of income to those currently alive, ultimately an open DB plan is already considering children yet unborn.
The massive amounts of money being transferred out of DB into DC poses yet to be answered problems for IFAs.
- How do IFAs intend to manage the long-tail risks of a client bank that is ageing and in many cases dementing?
- How do they intend to hand over not just the money, but the emotional intelligence that underpins their individual relationships with their clients?
- What do clients understand as the nature of an IFA’s stewardship? Is there an unspoken promise that succeeds the expectation of the IFA to keep it?
In our work at Port Talbot, Al and I came across many steelworkers who assumed that IFAs were simply replacing their previous stewards, the BSPS trustees.
But many of the IFAs had no intention of meeting these expectations, some were hit and run drivers who – once they’d left the factory gates – were seen no more.
The Trustees of BSPS are now the Trustees of BSPS2, they continue to take responsibility for the payment of retirement wages for the best part of 100,000 people who are typically reliant on them – for their future financial well-being.
This deeper intent is rarely recognised. But the Trustees of BSPS have been managing money over generations and will continue to do so well into the second half of this century. Were the scheme still open, as was the original intent, then their time horizons would be as infinite as the view of Swansea Bay from my hotel room.
Why financial advisers cannot compete for the mass market.
The fallacy of the KPMG article is that advisers can replace trustees in the stewardship of an individual’s retirement affairs. While this can be the case individually, it doesn’t work collectively. There are too few advisers and the advisers that there are will not be around as long as their clients.
We cannot suppose that the 8,500 people reported who have taken money out of BSPS and are now self-managing – using IFAs as financial stewards, will have their expectations met.
The sea outside my room is flat – financial markets are flat too.
But , as I’ll be telling those at the Great Pension Debate this morning, that will not always be the case. The time when people need navigation is not when the sea is calm but when storms are blowing.
Trustees know that – but do advisers.
And are there new advisers being nurtured to take over where the old ones leave off?