Sometimes it feels as though the world is changing at a faster rate than at any other time in human history and, with that, our attitude to money, savings and investments. Advisers are living in challenging but exciting times.
We have identified three areas that merit close monitoring; social, legislative and regulatory change. These issues are all interconnected and are already influencing the advice needs of clients.
The times they are a-changing...
Change is everywhere. Look back over a short period of time and the transformation around us is startling – from the technology, products and services we use, our attitudes to work and leisure, how we shop and the means of transport we use. Perhaps most notable though is the seismic shift that has taken place in the global political sphere.
Undoubtedly, 2016 was a politically charged year. We witnessed referendums, elections, resignations, impeachments, attempted coups and peace deals. This was a real gamut of events that is causing ripples well into 2017 and beyond, particularly as the UK faces a general election as it negotiates its exit from the EU and as Donald Trump's presidency progresses in the US.
Of course, political and social change are inextricably linked and history has taught us that social unrest is often most pronounced when economic progress is halted by a prolonged period of financial strain. It is little surprise then that we have seen greater activism and protest in the years following the global financial crisis (GFC) and the ensuing austerity. The established order has increasingly been challenged by electorates around the world and populism and nationalistic politics are on the rise.
... and so are your clients
Against this altered political landscape, advisers' traditional client base is undergoing significant transformation too, driven to a significant degree by shifting demographics and the rise of the most socially conscious generation; Generation Y or the so-called Millennials.
Outnumbering the baby-boomers significantly, the Millennials have grown up in a time of huge technological advancement, globalisation and the democratisation of knowledge. Some would argue that this too is the generation that has been most affected by the GFC and because of this formative experience Millennials engage with money in a different way from previous generations. They demand more transparency and accountability and many Millennials want investments that reflect their social and environmental concerns. This generation will make up an increasingly significant proportion of advisers' client base and their evolving needs will shape the type of advice required.
The older generations too are forcing change in the adviser community and they have very different financial requirements and retirement plans from their predecessors. Long gone is the idea of a traditional retirement. The needs of these clients are perhaps more complex than ever before. They require sustainable income in later life, but may also expect access to additional income, as well as control over their pensions savings and the opportunity to leave a legacy. On top of this, legislative change has transformed the global retirement landscape.
Legislate to liberate
Shifting demographics and ageing populations have seen governments around the world change their approach to welfare systems, not least pension provision. Ageing populations in many regions have led to 'top-heavy' societies, with fewer workers supporting an increasing number of pensioners who are enjoying historically long retirements. As such, legislation has been introduced to help address some of these at-retirement issues.
In the UK for example, the 2015 Pensions Freedom has been a huge transformative power for individuals and the financial services industry. Allowing anyone aged 55 and older to liberate their defined contribution (DC) pensions savings means that individuals can take control of how they spend that money, invest it and, just as crucially, make it last. Enhanced death benefits also mean that pensions are more inheritable than ever, which is attractive to those members who wish to leave a legacy. There has been a huge upsurge in pension transfer advice sought by defined benefit (DB) pension members wanting to take advantage of the same freedom. Tantalisingly high transfer values are also increasing the attractiveness of switching from DB to DC.
While this legislative change is specific to the UK, what's underlying it is a trend that can be seen across the developed world – the democratisation of financial risk. By that, we mean the shifting of responsibility from employer to employee, institution to the individual.
In many cases, the transfer values assigned to some DB pensions in the UK have turned people with fairly normal pension provision into millionaires overnight. These individuals may have limited understanding of how to invest such sums of money wisely or the sustainability risks involved. There are complex tax implications to consider too.
The weight of such financial responsibility is fuelling the adviser community like never before; providing a once-in-a-lifetime opportunity for advisers to further demonstrate their worth to clients. Prudent financial planning and advice on the investment solutions that can help clients decumulate successfully will go a long way to helping them achieve the type of retirement to which they aspire.
Changing regulations are also influencing the direction and focus of businesses across the financial services spectrum and around the world.
Using the UK as an example, the Financial Conduct Authority (FCA) has undertaken a study of the asset management sector in order to ascertain if the market is working properly and whether the products on offer provide consumers with value for money. This is particularly pertinent at a time when people are expected to take more responsibility for their own savings and investments and bear more of the risk.
In its interim paper, the FCA highlights a weak competitive environment in the UK and outlines the need for greater transparency across the board, from asset managers, to advisers and distributors. It has made some early recommendations on clearer communication on investment options, so that consumers better understand what they are investing in, what exactly they are paying for and how outcomes are measured. This theme is not unique to the UK and there are similar challenges in other developed countries.
Regulatory change is a necessary part of the financial services sector and it will influence the shape of the industry over the coming years. Those advisers who harness the opportunities ahead and can meet clients' diverse needs with a spectrum of next-generation investment solutions will thrive.
Change is constant and while it can feel daunting at times, it also brings opportunity for innovation, renewal and continual improvement. It stops complacency and, in an industry where people's savings and investments are at stake, that can only be a good thing.