Some things in financial services are over exaggerated.
However when it comes to appraising the impact of the changes announced at the 2014 UK Budget this is certainly not the case.
It will change the way in which consumers access their savings at retirement and it would be fair to say that we are all very much still in the process of digesting the range of potential outcomes.
Provider opportunities
When change occurs it is typically a specific market sector or type of company which is impacted, but the positive difference here is that challenges and opportunities are presented to companies operating in a wide range of financial services sectors, including asset management groups, life and pension providers, platform operators, offshore companies and specialist groups including SIPP operators.
The bottom line here is that everyone needs to respond in one form or another in order to position themselves for success post-April 2015.
International opportunities
There are business development opportunities in the retirement income markets of the UK, US and Australia.
Although each of the markets are at different stages of development and with different key drivers it would appear that each market requires a new breed of retirement income product which can provide a balance of secure income delivery and flexibility for clients.
The unknowns
Much of the provider focus in these early post-budget days is being focused on market research exercises with consumers and advisers.
It is vital for proposition development plans to be underpinned with sturdy and objective market research.
The main challenge here is that while provider strategies need to be implemented quickly, consumer and adviser awareness and understanding of ‘the new flexibility’ will move at a different pace.
Discussions between providers and the two key consumers of their products and services will therefore need to continue as post Budget market requirements evolve.
Early consumer indicators
AKG has had access to some early consumer research findings from an exercise carried out by
Consumer Intelligence during March/April 2014.
One of the key questions asked of the consumer audience related to how they might wish to take their retirement benefits.
These very early and high level indicators point towards a consumer preference for a mixture of annuity and drawdown strategies (see chart).
Proposition development
It is still very early days in terms of proposition development meaning that we have yet to see any major market moves.
With typical development lead times of 12 to 18 months in the provider market, the launch of new solutions in time for the new world in April 2015 will be challenging.
As such we would expect to see the 12 months from April 2015 onwards as an extremely busy time for proposition launches or tweaks.
The shape of things to come?
Product and/or technology-based solutions which might emerge from various market players include:
• Platform operators – Enhanced retirement income functionality, in the form of tools and/or products. Products may be in-house or sourced from/linked to external partners.
• Fund management and DFM groups – Income- producing investment solutions, possibly managed multi-asset funds or managed portfolios, targeted specifically at income drawdown clients with a focus on the outcome, i.e. the amount of targeted income produced by the fund. Use of mechanisms and strategies to dampen volatility and smooth returns.
• Life and pension providers – Simple drawdown solutions with tightly constructed and governed fund ranges. New forms of unit-linked guaranteed products or secure income facilities. Evolving lifetime or fixed-term annuities. Combination product solutions.
• Offshore providers – Evolving tax-efficient and income-producing offshore bond solutions. Estate planning options and functionality.
• Banks – Fixed-term deposit accounts designed to accommodate tax-free cash and/or drawdown lump sums.
• Structured product providers – Fixed term products designed to balance return of fund and potential for upside which could be targeted for use within an income drawdown product strategy or outside this environment to target tax free cash and/or larger drawdown sums.
Over the longer term ‘stage two’ developments might include the linking up of the retirement journey, its various life stages and the range of retirement asset sources at the disposal of consumers.
Some examples of this might include further innovation relating to equity release and long-term care and their interaction with some of the retirement income solutions outlined above.
Strategic partnerships
A range of competencies will be required in order for providers to deliver compelling solutions and ultimately to be successful in future years including insurance (and re-insurance), asset management and technology.
Where companies do not have these competencies or skill sets within their existing toolkit they will need to engage in strategic partnerships.
It looks like the new demands brought about by the Budget changes will accelerate activity in this area, as it will inevitably be harder for providers to do everything themselves.
Target market strategy
Clear targeting of specific client segments in terms of the marketing and sales of new propositions will remain a critical exercise in terms of future success.
High net worth clients at the top end of the market will remain extremely well catered for in terms of the availability of product and fund solutions as well as access to advice.
However, the market which should be causing the most excitement is the mainstream, ‘middle-Britain’ market.
The new pension triviality rules are likely to mean that clients with funds below £30,000 may be tempted to ‘cash in their chips’ and so consumers of funds between £30,000 to £150,000 are of most interest to those appraising new business opportunities.
A key observation, built on previous market experiences, is that complex product innovations will find it harder to gain traction in the mainstream retail market.
Adviser service strategy
The financial adviser and wealth manager communities remain core delivery channels for wealth management solution providers.
New look post-RDR distribution teams are emerging and the fact remains that advisers value face-to-face interaction and quick access to account trouble-shooting when required.
The reality for all is that cost efficiencies need to be created and so, in all likelihood, more of the ongoing support delivered by providers is likely to be done over the phone or online.
In the adviser distribution market, providers will need to work hard to design products which can satisfy compliance functions and align with established adviser business processes and systems, e.g. back office systems, risk profiling and/or cashflow modelling exercises.
Direct to consumer
A huge opportunity and we are now starting to see signs of the long-predicted emergence of new players and propositions in the D2C execution only market.
This is only likely to continue over the next 12 to 18 months as providers seek to engage with those clients who cannot afford and/or do not wish to engage with advisers.
Making this move removes a delicate balancing act for those providers who also have a large adviser audience.
Direct to consumer, with guidance
Still something of an unknown quantity because of the yet-to-be properly articulated ‘guidance’ element.
But this has the potential to be hugely influential in the changing financial services landscape and presents an opportunity for a range of market players.
Financial planning opportunities
The Budget was a major plus point for financial advisers in that many people will need valuable assistance and advice when planning their retirement income strategies.
In the post-RDR world, affordability remains an issue but those consumers who can afford and do see the value of advice will have access to a professional adviser community.
Tax planning opportunities
Whether this is a service offered by financial advisers or specialist tax planners there will be a requirement for efficient tax planning.
In particular great store should be placed in working with clients to access income and capital in a tax-efficient manner from various product wrapper regimes including pensions, ISAs, onshore and offshore bonds.
Furthermore financial and tax planning with a client’s dependents and estate in mind will continue to be seen as a valuable service.
Strategic questions
So there are big strategic questions being posed during this period of change.
There are clear opportunities, for existing and new market players within this, for those who can demonstrate financial strength, commitment and innovation.
A new UK landscape is emerging with new forms and mechanisms for the delivery of advice and guidance.
There will be new products launched (but with old underlying appetites – guarantees, tax planning) and new technological solutions which may marry tools, component products and services from both UK and international providers.
It will be fascinating to watch this unfold.
