The cost-of-living crisis has forced Brits to adjust their investment plans, with over half (53%) of UK financial advisers reporting changes to their clients’ portfolios, Schroders found.
In comparison, nearly 70% of advisers expected to adjust client portfolios as a result of the cost-of-living crisis in May 2022.
In its annual ‘UK Financial Adviser Survey’, which polled 439 advisers between 18 October and 8 November 2022, the asset management giant revealed that capital loss was the most prominent reason for the changes in client investments.
This was true for 63% of advisers. Other concerns expressed by clients included inflation, generating sufficient income and rising interest rates.
The adjustment exercises saw a significant number of advisers increasing client holdings in cash, said Doug Abbott, head of UK intermediary at Schroders, during a roundtable discussion attended by International Adviser.
But he added that this defensive tactic is likely to remain short-lived as 20% intend to reduce their cash holdings next year in favour of equities.
Sustainability
As allocation to alternative assets rises and is expected to continue in an upwards trend, 76% of advisers reported considering specific sustainability and ESG factors as part for their selection process – a significant increase from 43% in 2019
This is coupled with a rise in the number of clients explicitly requesting their investments reflect such criteria.
Just 8% of advisers would prioritise maximising returns and minimising risk over sustainability, while 89% believe that the events of the past two years reinforced the importance of both prioritising ESG factors and using an asset manager which actively engages with company management.
But there is still an overall lack of confidence in the ability to talk about these issues with clients – the proportion of those reporting very high confidence in talking to clients about ESG dropped significantly in the past 12 months, to just 8% in November 2022 from 25% in November 2021.
At the same time, although confidence is waning, only 40% of advisers would like more educational support on sustainable investing.
Interestingly, over half reported that clients are now initiating conversations themselves about fossil fuel-related investments or increasing allocation to clean energy and renewables.
Wealth transfers
Advisers’ challenges, however, do not stop at how to talk to clients about ESG.
Gillian Hepburn, intermediary solutions director at Schroders, revealed that advisers’ biggest worry is being unprepared for wealth transfers.
In fact, 60% are concerned they might lose assets when a client dies or passes down wealth – up from 54% expressing the same worry in May 2022. This is also fuelled by the fact that nearly half (46%) of advisers reported the average age profile of their clients has increased over the past five years, with the vast majority (68%) saying their average client age is currently between 51 and 64.
Yet, there is a widespread lack of strategy when it comes to tackling the challenges generational wealth transfers pose. Schroders discovered that just 26% of advisers have a specific proposition for targeting the transfer of family wealth to the next gen.
Additionally, financial advisers are also falling short when it comes to attracting and retaining younger clients and women.
Only 14% have a differentiated sales and marketing strategy for younger investors – down from 22% in May 2022 – and just 5% have plans in place specifically for women – a significant drop from 11% in May 2022.
The wealth transfer attitude of being worried about losing assets but failing to act on it is also represented by the fact that fewer and fewer advisers are now taking on clients with less than £50,000 ($60,000, €58,000) in assets.
Outsourcing
Unsurprisingly, regulation took the top spot as the biggest business challenge for the majority of advisers – especially considering the upcoming Consumer Duty due in July 2023.
In fact, when asked about the upcoming piece of regulation, just 18% of advisers claimed to be fully prepared, with 76% preparing their plans (which were supposed to be sent to the Financial Conduct Authority by 31 October 2022), and 8% hadn’t even started.
Other business challenges included servicing existing clients, succession planning and/or exist strategies, and finding new clients.
So it comes to no surprise that Schroders found an increase in the number of advisers using outsourced investment solutions. Currently, around 20% reported greater use of outsourcing in the past 12 months – up from 17% in May 2022 and 16% in November 2021.
Not only are they turning to third parties more frequently, but they are using outsourced solutions to help manage a larger proportion of clients’ assets – with well over 80% looking to increase allocation to third-party services in the next 12 months.
Focus still on ‘older, wealthier clients’
Hepburn said: “This year’s survey finds that, despite clients’ interest in sustainable investment solutions, the number of advisers who feel confident about discussing this topic with clients has reduced.
“Some 40% of advisers would like more support but it’s also interesting to observe a considerable proportion of advisers (37%) do not think they receive enough information to demonstrate that an investment manager who actively engages is driving change.
“As a provider of investment solutions, it is also noteworthy to see the continuing upward trend for advisers to outsource portfolio management, citing a wish to spend more time with clients in order to understand their needs.
“As they navigate market turbulence, this time spent with clients will become ever more critical.
“Directly engaging with client at this time will perhaps also be helpful when developing strategies for advising the next generation, as this year’s survey has found that the number of advisers who are concerned about losing assets as wealth transfers between generations has increased.
“However, despite the perceived opportunities of wealth transfer, there still appears to be a focus on older, wealthier clients.”
