Discretionary management: Will RDR bring growth?

Mark Hendricks asks what discretionary managers bring to a retirement planning strategy.

A new dawn for the world of financial advice is now imminent. After endless articles and seminars about the Retail Distribution Review (RDR) these new regulations become law in only 10 months. Financial advisers are currently working out exactly how RDR will affect their own business. One area which represents a huge growth opportunity is retirement planning.

The problem with retirement planning is that there is a vast amount of information available that can be overwhelming for some clients. Yet, with millions of people now likely to spend 20 or even 30 years in retirement without earned income, our challenge as financial advisers and discretionary investment managers is to capture their attention and fast!

Pension simplification - really?
An awful lot has changed in the world of retirement planning. For example, how many clients know there is no longer a requirement to buy an annuity by the age of 75? Or that they can start drawing their pension at only 55? Or that the annual limit on making highly tax efficient pension contributions has been slashed from £255,000 to £50,000?

From April 2012, the lifetime allowance is being reduced (and frozen) from £1.8m to £1.5m. Many financial advisers will now be suggesting that their clients register for fixed protection before this deadline, for this very reason. Some experts believe that protected rights will be abolished from April 2012. Again, how many clients with large sums invested are planning for this? Do they understand what is meant by the new flexible drawdown rules? Or even basic income drawdown?

Against this complex backdrop of changing pension regulation, clients will understandably be concerned about falling income as 15-year gilt yields, used to price annuity rates, have dropped sharply after heavy buying from the Bank of England. Yes, Quantitative Easing is at least partly to blame and there could be more on the way.

Benefits of partnering with a discretionary investment manager
Not only do financial advisers need to be aware of all these pension regulatory changes, but the Financial Services Authority (FSA) has also set clear and firm guidelines for the investment management aspect of retirement planning. Working with a discretionary investment manager partner for self-invested personal pensions (SIPPs) and small self-administered schemes (SSAS) means financial advisers can generate more business, meet the tough RDR requirements and minimise compliance risk.

The FSA says that "where an asset allocation has been recommended the scheme needs to be reviewed and rebalanced where necessary". By outsourcing the pension investment management to a discretionary investment manager who carries out constant reviews with dynamic rebalancing of portfolios, a financial adviser has more time to focus on new business generation and servicing existing clients' retirement planning needs.

By working with a discretionary investment manager, a financial adviser's clients gain access to a much wider range of investments (including share portfolios) and exchange traded funds. A discretionary investment manager has the buying power to save money for clients by accessing institutional fund pricing, where the underlying annual management charge is highly competitive.

A discretionary investment manager will conduct rigorous in-house research, supported by a robust and disciplined investment process, on both share portfolios and collectives, often via face-to-face meetings with external fund managers before investing.

A discretionary investment manager will introduce a financial adviser to a named investment manager for that personal touch, offering both the financial adviser and their client annual review meetings to ensure everything is on track. Importantly, a discretionary investment manager will help determine suitability and manage the client's expectations by illustrating the impact of flexible levels of drawdown and asset allocation on the future value of their pension investments.

An RDR solution for retirement planning
Clients are willing to pay for good and ongoing pension advice as they grow older and face ill health or lose loved ones. Clients recognise that with fast moving global markets it makes good sense for their financial adviser to outsource the active management of their pension portfolio to a specialist investment firm. The regulators are simply encouraging this approach with RDR. Partnering with a discretionary investment manager enables a financial adviser to grow their retirement planning business and also keep the regulators happy!

Mark Hendricks is investment manager at Quilter