Not long after we were coming to terms with the impact of the pandemic and the first lockdown on our lives, I wrote about how uncertain times can underline the value of advice.
Back then, as markets fell, clients at retirement sought reassurance from advisers about the sustainability of their drawdown pots. Many clients were looking for that extra support because an adviser’s role has always been as much about the emotional side as it is about the technical side.
The challenge for advisers around 12 months ago was meeting individual clients’ needs, as well as providing that reassurance. And as we know, there’s no one halcyon solution to this. All clients’ circumstances are different and reviewing their needs from scratch can be incredibly time consuming. One well-established solution that can help though is a client income withdrawal plan such as a Withdrawal Policy Statement.
It can set out the steps to take during a market downturn to not only help mitigate risk to the client’s drawdown pot but to help give them reassurance that there’s a plan in place. And when the market outlook is more positive, it can allow advisers to deliver good news.
Now, with both the Bank of England and the International Monetary Fund (IMF) just two of the bodies forecasting a more rapid economic recovery post pandemic than anticipated, clients may soon be seeking out their advisers about increasing their drawdown income.
If they aren’t already, advisers may want to start preparing for an increase in client demand. And the easiest way to handle it is being able to refer back to a pre-agreed withdrawal plan. If there’s no withdrawal plan in place, then now would be a good time for advisers to think about core messaging for clients around long-term sustainability of their drawdown pots and what sort of income increase would be in line with good planning.
Behind the potential client demand for increased income
According to Andy Haldane, Chief Economist at the Bank of England, an economic rebound is waiting ‘like a coiled spring’. In a speech published on the day of the Budget, he said that because of the unusual nature of the pandemic-induced recession where the policy response was bigger than the 2008 financial crisis, the economy would quickly recover.
In early April meanwhile, the IMF announced that most advanced economies will emerge from the pandemic with little lasting damage due to the relatively quick rollout of vaccines and the increased public spending and borrowing of governments. It added that the global economy is set to enjoy two years of rapid growth in 2021 and 2022 of 6 per cent and 4.4 per cent respectively.
Following 12 months of uncertainty, this positive outlook is likely to have two potential impacts on client behaviour. And they will be the drivers behind the demand for increased retirement income.
The first is that growing confidence in the markets may increase the value of some clients’ assets. This may translate into an emotional willingness by clients to spend more. The second potential impact on client behaviour is the easing of lockdown restrictions. For newly-retired clients in particular, there will be a pent-up demand to spend on travel, so there’s an inevitability that they will want to withdraw more money to do the things they haven’t been able to do.
There’s actually a consistency in behaviour between what happens in the markets and clients’ willingness to spend. Markets are driven by confidence and if confidence is growing, it implies that client behaviour is going to reflect that, so creating a virtuous circle.
The value of having an income withdrawal plan in place
There are already signs on our platforms that there’s an emotional willingness by some clients to increase their spending as we’re seeing more drawdown income withdrawals.
There will also be those clients who, during the first lockdown, agreed with their adviser to rein in their spending because of falling valuations. With valuations likely to rise again, there will be an expectation by clients that it might be reasonable to increase their income, depending on the conversation they had with their adviser. And there will be some clients where their valuation does not increase by much and that’s another conversation advisers need to have.
With all these scenarios, what helps is having a plan.
A plan such as a Withdrawal Policy Statement helps to set client expectations about how their income will be adjusted in both good economic times and bad. It offers a great starting point for discussions with the client about any adjustments that need to be made to their income withdrawals to ensure confidence in the long-term sustainability of their drawdown pots. It doesn’t even need to be firm or over complex, or commit either party, but simply state the principles for managing drawdown income withdrawals through a market upturn and a market downturn.
By setting expectations upfront, it makes the adviser’s role easier to adjust a client’s income so there are no surprises. And given that clients have now experienced both good and bad economic times, it should be easier to have that conversation with them about managing their retirement income through the ups and downs, and telling them what their options are so they don’t run out of money.
Most of all, a plan allows for flexibility to cover all eventualities and means that the client knows, that whatever happens, their level of income can be adjusted to reflect their needs.
Good advice is as much about the future as well as the present
With more and more news reports forecasting an economic rebound, advisers may already be taking calls from clients who want to increase their drawdown income. And those advisers who, before lockdown, had good conversations with clients about having a Withdrawal Policy Statement in place can refer back to it now.
Having a plan to deal with good economic times as well as the bad, means many advisers have already been able to give clients confidence. Because part of an adviser’s role is to help their clients look forward to a positive future and when there’s an economic bounce, and an opening up of the economy, to potentially increase their income.
And it’s the existence of a plan that helps give advisers an opportunity to develop closer relationships with clients, encouraging the savers to spend when markets are confident, and the spenders to rein it in when markets are turbulent.
What’s most important is a balanced approach. And for those clients at retirement looking to the future, it’s having the peace of mind that when the potential economic bounce happens, they’ll be able to increase their withdrawals and start doing some of the things they haven’t been able to do. Because uncertain times underline the value of advice.
Read Alastair Black’s previous blogs on Retirement advice, the regulator and why now is the time for advisers to take stock and Assessing capacity for loss.
The value of investments can go down as well as up and your clients could get back less than they paid in.
The views expressed in this blog should not be regarded as financial advice.