Are IFAs missing a chance to gain retirement business?

A gap in the market is starting to attract new solutions to help IFAs tap into the collective wealth baby boomers are set to unload into the retirement market.

Billions of pounds of retirement money that currently bypasses IFAs could prove a lucrative future money-spinner. There is a growing opportunity to help retiring clients while still generating revenue from the millions of “small pot” pension funds that usually don’t pay advisers enough to cover their costs.

It has almost become ‘best practice’ in the industry for IFAs to segment their client banks with a view to hiving off the smaller ones and concentrating on the most lucrative. This is being helped along by the RDR’s proposals that are encouraging IFAs to shift their sights towards the top end and become wealth managers.

A recent article which appeared in Professional Adviser, by Richard Mein of discretionary investment service Parmenion, questioned the wisdom of shunning smaller or less active clients. He pointed out that for every one client with £1m in investable assets, there are perhaps 50 with £100,000 and 1,000 with £25,000. He referred to these as ‘zero strategy clients’ who collectively have the value of business to offer a treasure trove of opportunity if only the IFA could deliver the right proposition.

Power shift

A similar situation is apparent in the retirement income market where those with money purchase schemes need to use their pension to replace lost salary. This is a part of the market where retirees and advisers have arguably been at a disadvantage, while the annuity providers have reaped the rewards of apathy. But the balance of power is now shifting.

Last year the average size of pension pot used to buy an annuity was around £25,000 but this figure is hugely distorted by the few relatively wealthy people who have larger pension pots. If you strip out the wealthiest 10 per cent of annuity buyers – the 50,000 with pension funds of more than £50,000 – then the average pot of the remaining 400,000 people falls dramatically to less than £15,000.

These buyers are in an unenviable position. They have probably never retired before so have no experience and little knowledge of the market. Even if they do understand their right to shop around, they will have a tempting offer in hand that may not appear generous but will offer the path of least resistance when switching on an income.

Some of these will already be IFA clients keen to seek professional advice. But while IFAs might like to help, they can struggle to make it pay – small pots generate small commissions. So that means either turning the client away or charging fees the customer can’t generally afford.

Technology is driving change

Technology is changing this environment by making it easier to access information, and by speeding up transactions and cutting costs. This has led to the creation of big annuity specialists with the size and scale to process large quantities of non-advised business, often running parallel to an advised service. More recently we have seen providers such as Aviva start to eye the potential in the market, forming alliances with enhanced providers to try to add extra choice to their proposition. And there is much interest in post-RDR services that will enable bigger advice firms to offer restricted advice services.

This may be good for retirees who are being offered a better choice, but it is not such good news for those smaller and medium-sized IFAs who don’t have the scale of the big players and don’t want to see business pass them by.

This is a clear gap in the market that is only now starting to attract new solutions to help IFAs tap into the tsunami of collective wealth the baby boomers are set to unload into the retirement market. The £11.5bn in revenue that flowed into the annuity market last year is forecast to double to £23bn within five years, giving a huge incentive for advisers to use services that allow them to secure a piece of the action.

The Annuity Clearing House is our recently-launched answer to helping those advisers – it is one of the first but unlikely to be the last. It operates as a simple referral service that allows advisers to be confident a client who can’t afford advice is getting a better deal and to earn revenue for introducing the business.

Similar services are bound to be launched in the coming years and their future success will depend on the IFA believing they are complementary rather than competitive. They have huge potential to help adviser and provider. The adviser can receive extra revenue with reduced regulatory risk. The provider gets ‘clean’ bulk business that is faster and cheaper to process.

Above all they should help the retiree who will be able to compare the income offered directly against their own pension company’s quote, so will have tangible evidence upfront of the financial benefit of using such services. They will also get more choice across a range of products and be able to select enhanced or impaired plans and even asset-backed options.

More than £6bn of pension money flowed into the annuity market last year from around 400,000 different people with funds worth less than £50,000. This year the figures are set to be even higher. ‘Zero strategy’ retirement clients may just be about to become a thing of the past with both IFAs and clients reaping the benefits.

Peter Quinton is chairman of the Annuity Clearing House.