At first sight the interim report on retirement outcomes produced by the Financial Conduct Authority (FCA), the UK’s financial regulator, earlier in July doesn’t appear to have much relevance to firms catering for rich, as opposed to “mass affluent”, customers.
With around 90 percent of pension funds accessed early by consumers since the advent of the UK government’s “pension freedoms” in April 2015 worth less than £30,000 this is not likely to interest the typical UK management firm even if, as the FCA’s report points out, 52 percent of the funds withdrawn are moved into other savings and investments.
Nonetheless, UK wealth management firms may be ignoring a potentially important source of revenue and profits.
Pensions, or more specifically, self-invested personal pensions (SIPPs) along with assets held in other tax-privileged saving vehicles such as individual savings accounts (ISAs), are becoming an increasingly important source of business for UK wealth management firms.
Take SIPPs for example.
According to Compeer, a London-based research firm that focuses on the wealth management sector, SIPPs accounted for £47.8 billion, or 7.1 percent of the £665.0 billion of assets under management at UK wealth management firms (private banks, private-client investment managers and full-service wealth managers) at the end of 2016. At execution only (X0) stockbrokers SIPP assets accounted for another £39.0 billion, or 24.27 percent of total client assets of £160.7 billion.
More importantly, SIPP and ISA-related assets grew much faster than the UK wealth management sector as a whole according to Compeer.
SIPP-related assets grew by 171.6 percent from £17.6 billion to £47.8 billion between 2010 and 2016 at Compeer’s universe of wealth managers. At XO stockbrokers SIPP-related assets grew by 163.5 percent from £14.8 billion to £39.0 billion.
ISA-related assets grew by 112.2 percent from £38.6 billion to £81.9 billion between 2010 and 2016 at UK wealth managers and by 145.9 percent from £20.7 billion to £50.9 billion at XO stockbrokers.
Furthermore, they should assume even greater importance.
For ISAs this will almost certainly occur as a result of increased annual allowances. These have increased significantly in recent years and currently stands at £20,000.
The situation as far as SIPPS are concerned is more complicated, not least because the UK government seems compelled to change the annual tax reliefs and limits on the volume of assets paid into SIPPs on an annual basis, and not always in an upward direction.
Nonetheless, the advent of “pension freedoms” and in particular the ability of SIPP holders to drawdown assets held within these vehicles instead of using them to purchase annuities, should still provide a substantial impetus.
As the FCA’s report points out (and as even this self-directed investor realises) drawdown is complex. Although it is not beyond the bounds of possibility that reliable drawdown and rebalancing apps will become available to self-directed investors the likelihood is that wealth management firms that can combine advice with execution probably hold a substantial advantage in this respect and will continue to do so.
For as many people are probably realising to their cost drawdown poses several problems, and not just from an asset allocation perspective. There are also significant tax and other considerations to take account of.
So far these seem to have passed consumers by, however.
According to the FCA’s interim report on retirement outcomes the number of people that opt for drawdown without taking advice has risen from five percent to 30 percent since the introduction of the “pension freedoms”.
Furthermore, many of those that decide to take the drawdown option take the path of least resistance. Instead of shopping around they merely accept the drawdown facility offered by their current pension provider.
Wealth managers may feel that the volume of assets at stake is insubstantial. But this is probably far from the case.
The volume of assets held in a SIPP or personal pension for someone nearing retirement could amount to six or even seven figures. Combine these with other assets held in SIPPs, broking or even wealth management accounts and the volume of assets that might need advice and management might exceed by a significant margin the minimum thresholds imposed by even the most fastidious wealth management firms.
But can wealth management firms convert these positional advantages into something that will generate futures revenue and profits?
Given the efforts made by some firms, and especially some of the former stockbroking firms that have belatedly realised the virtues of wealth and financial planning, it seems that some wealth managers are getting the message.
But more probably needs to be done.