There has been a shift in consideration for those seeking financial advice, requiring advisers and paraplanners to consider new yet traditional scenarios, observes Natalie Beer, head of sales at intelliflo.
We’re less than halfway through the decade and yet the 2020s already look very different to the preceding 10 years. Although the period following the 2008 global financial crisis brought all manner of political, economic and other disruptions, we didn’t see during that time anything like the impact that inflation has had over the past year.
After a long period of benign inflation and low interest rates, not to mention a lengthy bull market, we’ve now seen the return of the more ‘traditional’ risks. That has real implications for financial planning. Because while the events of the 2000s and 2010s caused their own ripples in the global economy, nothing hits household and personal finances quite like inflation.
Back to basics
For many financial advisers and planners, client considerations are often built around life stages. The patterns and priorities of financial planning are dictated to a degree by the client’s age and circumstances. From buying a home and starting a family to estate planning and navigating retirement, plans have been closely interlinked with the client’s life stage.
However, the effects of inflation and higher interest rates have disrupted that process. More than 80% of financial advisers told Canada Life earlier this year that inflation was the main concern for their clients, followed by investment portfolio values[1]. It’s understandable that clients are worried about recent price rises. Savings buffers have been eroded, debt levels have increased, and general financial resilience has worn thin. Mortgage payments have gone up sharply for many households, exacerbating a cost-of-living crisis that was already in full flow[2].
While mortgage and rental costs have primarily hurt those of working age, a growing proportion of retirees still have home loans to repay. The Office for National Statistics’ latest English Housing Survey shows that nearly 300,000 over 65s still have a mortgage and more than 400,000 live in private rental accommodation[3].
Higher interest rates have challenged assumptions about spending power too, posing a new challenge for anyone who has retired in the past decade or so. While the triple lock has provided reassurance where state pensions are concerned, those in drawdown plans have had to weigh up the impact of increased withdrawals to cover higher living costs. Many will have turned immediately to their adviser for guidance on sustainable levels of withdrawal and alternative ways of supporting their income.
All of this has been accompanied by heavy outflows from equity funds, reflecting low investor sentiment amid recession worries. Advised net sales on platforms reached a new low of £2.8bn in the second quarter, according to the lang cat[4]. It said outflows had come primarily from ISAs and pensions, but also noted reports of smaller ad-hoc withdrawals from investments. Similarly, almost half of advisers told Standard Life this summer that clients had been withdrawing funds to cover essential outgoings and address income shortfalls[5]. More than a third reported clients deviating from their previously set plans by withdrawing funds, and a similar proportion said clients had taken money out of plans to shore up their cash savings provision.
Adapting to reality
After such a long period of relatively benign markets and inflationary conditions, the re-emergence of interest rates as an issue of concern will have taken some clients by surprise. Few, regardless of life stage, will be entirely unaffected. In this altered landscape, the issues arising at each life stage are likely to be different to those fielded in recent years, and advisers have had to adapt.
Ideally, various scenarios will already have been considered during the planning process, with new scenarios now being added to the calculations. Technology – cashflow planning software in particular – comes into its own here. Advisers use cashflow modelling tools to help clients visualise how their financial future might be mapped out in different situations. Scenarios such as high inflation and interest rates will often have been explored during the initial planning process. For clients, it can be reassuring to see how effectively those different circumstances were modelled, and how that helped ensure they remain on target to meet their objectives.
Being able to demonstrate the future effects of variables such as higher and low inflation adds further validity to existing plans. Perhaps more importantly, clients can see how different responses to the changed landscape might play out. For retirees, it might be about understanding the impact of taking money out of drawdown pots to cover shortfalls elsewhere, or to work out how much they can spare to help younger generations through the cost-of-living crisis.
Resilience and re-engagement
The recent disruption also represents an opportunity for advisers to revisit the overall plan with their clients. Some will have been unnerved by the return of inflation and higher interest rates, and potentially feel anxious about their long-term plans. Visual representations of how longer-term investment and pension projections remain on course regardless of short-term bumps in the road can help build confidence and emotional resilience in clients.
The advisers and planners using technology effectively in guiding clients through the changing economic landscape are best placed to minimise disruption to their clients and to their service.
[1] https://www.canadalife.co.uk/news/inflation-cited-as-number-one-concern-for-clients/
[2] https://www.ons.gov.uk/economy/inflationandpriceindices/articles/costofliving/latestinsights
[3] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1139366/2021-22_EHS_Headline_Report_Section_1_Households_Annex_Tables.ods
[4] https://langcatfinancial.co.uk/2023/08/23/the-top-class-wednesday-update-is-sat-in-the-dressing-room-at-half-time/
[5] https://www.standardlife.co.uk/about/press-releases/clients-withdrawing-funds-to-plug-financial-shortfall
