Research by Nextwealth, sponsored by Aegon, found that nearly three quarters (71%) of the 200 advisers interviewed pointed to this as a major worry.

The researchers defined this as clients ‘outliving their money’. The significant increase in the cost of maintaining a moderate retirement, along with a continuing rise in how long people are living are the underlying factors driving it.

See also: Blackburn man pleads guilty in £19m investment fraud case

The second biggest concern cited by the advisers was inflation and the cost of living in general at 64%, and long-term care costs at 49% of advisers was third.

Aegon noted that the PLSA Retirement Living Standards reported a substantial increase in the amount needed for a moderate retirement over the past year.

In terms of client expectations for retirement, the researchers found 76% of advisers reported clients hope to maintain the same standard of living in retirement as before retirement, 65% said clients expressed a desire to assist their children or grandchildren financially, while 45% of advisers said their clients wished to travel or live overseas.

Steven Cameron, pensions director at Aegon, said: “While the prospect of living longer brings many benefits, this research shows there are many challenges that come with navigating and making the most of your retirement years.

“71% of advisers say that clients are concerned about running out of money before they die, which raises real issues about the adequacy of current savings behaviours, as well as highlighting the value of advice at and through retirement, including if drawing a flexible income.

See also: Vanguard rolls out hub for UK advisers

“Worries about high inflation and the cost-of-living crisis also feature high on the list, with advisers finding that 64% of retirement clients raise concerns due to the current economic climate.

“It’s not surprising that worries over the cost of long-term care features as a top three concern for retirement clients,” Cameron added. “These findings highlight how important it is for Government to provide more certainty over social care funding, so advisers can help their clients to plan ahead.

“These findings reinforce the research we’ve conducted on how living longer has impacted the retirement landscape. Those approaching or in their ‘Second 50’ are bearing more of their own financial risks. This means that personalised financial planning based on an understanding of clients’ hopes and fears is crucial for tailoring strategies that meet individual needs and provide peace of mind.”

See also: The Lang Cat: Advised platforms suffer record outflows in 2023

The firm has published a report titled Future of Financial Advice, which it says uses data and insights to highlight the ‘disruptive forces’ that are determining the future shape of the retail financial advice market.

First, small firms will continue to thrive. Nextwealth said firms with up to 100 employees and up to £10m in revenue will have defined a robust operating model and will have a partner for compliance support. Most will adopt a single source tech stack and they will focus on a client niche or local community.

Heather Hopkins (pictured), managing director, commented: “In spite of a long history of small and micro advice firms, our prediction that small firms will thrive in the future seems to fly in the face of existing views. However, our research highlights that while there is a high and sustained level of consolidation, this remains matched by the replacement rate of small advice firms spinning out of larger corporates and new registrations.”

See also: Vanguard rolls out hub for UK advisers

The second shift is that the number of clients served will grow by 30%. Hopkins said: “Firms will use segmentation models to define propositions, making clever use of tech and investment solutions to meet client needs. The concept of spending two or three hours at particular life moments face-to-face with a trusted adviser will not disappear, but where it suits client needs and preferences, they will increasingly self-service and interact with other members of their client service team.”

The next of the predicted changes is a gradual shift away from asset-based pricing. Hopkins commented: “As a result of the continued downward pressure on fees, combined with new service-based propositions and the greater focus on delivering value to clients, we expect a gradual shift away from asset-based pricing towards new fee structures.”

See also: Premier Miton’s David Jane: Reframing income as an output rather than a style

The fourth major shift detailed in the report is an expectation firm size will be measured differently.

“Measuring firm size based on assets and number of advisers is outdated,” noted Hopkins. “While data on employee numbers and revenue is harder to get, we think they are more important. Our report lists six adviser business segments which all go a step further to defining a variety of business and operating models, recognising some of the distinguishing features between advice firms.”

The final of the five disruptive shifts is AI playing a key role in compliance checking.

Hopkins explained: “We found that regulation is regarded as hindering the growth of the advice market, although everyone we spoke to emphasised the importance of a good regulatory regime and framework.

“The regulatory burden is felt acutely by the small firms that continue to be vital to the profession, and tighter regulatory oversight of significant numbers of such firms is currently a major challenge. We predict that AI will be used to support the scaling of compliance checking, which should help small firms to present a more manageable interface with the regulator.”

See also: Why investors need to take outlooks with a pinch of salt

Research by NextWealth for Aegon UK found 68% of advisers said some or most of their clients have stayed in work longer than earlier planned, or deferred accessing retirement savings.

More than half of advisers (59%) said clients are reviewing the amount, or timing, of passing wealth to the next generation.

See also: The Lang Cat: Advised platforms suffer record outflows in 2023

Other notable findings included 53% saying their clients wanted to decrease their level of investment risk, although 36% noted they had seen clients increasing their investment risk.

NextWealth also found 53% of advisers said their clients were looking to guarantee some income through a combination of an annuity and drawdown.

The research was conducted in November 2023 and gathered responses from 200 financial advisers.

Steven Cameron, pensions director at Aegon UK, said: “The challenging economic conditions of late have impacted most people, including those approaching or in retirement. This research shows just how widespread behavioural changes are, which in turn shows just how valuable retirement advice is, especially in times of change.

See also: It’s time for multi-asset managers to ditch bond proxies

“The recent high interest rate levels and the corresponding rise in annuity rates may also have led to more clients seeking to guarantee some income, including through combinations of annuity and drawdown.”

“Overall, the research paints a picture of many clients changing their behaviour around retirement, but in a wide variety of ways. This shows the important role advisers play in tailoring their advice to individual needs and preferences, particularly amongst those approaching or in retirement.”

The MPS Proposition Comparison Report found that assets in discretionary MPS grew 12% over the year to 30 September, outpacing the 9% growth rate for adviser platforms over the same period.

According to Heather Hopkins, managing director of NextWealth, this highlights that discretionary MPS remains a strategic growth driver within the wealth management sector.

However, the report highlighted investment performance among discretionary fund managers (DFMs) as a concern, with one respondent claiming: “Clients are fed up with lacklustre returns. One year is okay but it’s starting to feel like groundhog day.”

Other market dynamics impacting MPS providers included price pressures, consolidation, and regulatory change.

The report is based on data requests from 41 discretionary fund managers (DFMs), pricing analysis conducted across 313 portfolios, a survey of 244 financial advisers, and a survey of 40 financial advice professionals on compliance frameworks underpinning discretionary MPS.

Quilter WealthSelect was the top DFM for net asset growth, adding £2.6bn in the year to 30 September. Timeline Portfolios, which Defaqto named as the provider of the most recommended MPS among advisers, grew a net £1.8bn over the 12 months.

Tatton Asset Management remains the largest MPS provider, with AUM of £12.9bn.

Charges

The average MPS cost paid by end clients dropped to 60 bps over the 12 month period, down from 0.67% in 2022 and 1% in 2021.

Meanwhile, the average ongoing charges figure (OCF) has fallen to 40bps, a drop of 35 bps over the last three years.

Hopkins also noted that DFMs which charge less saw assets grow more rapidly over the 12-month period.

Firms charging a combined MPS fee and OCF of less than 0.8% grew by an average of 8% in the year to 30 September 2023, compared to negative growth for those charging 0.8-1% and 1% growth for those with charges over 1%.

To read more on this topic, visit: Research in Finance: 74% of DFMs and IFAs concerned about greenwashing

Advisers

NextWealth found 41% of advisers use discretionary MPSs and 24% expect to increase use in the next 12 months. The most popular combination among advisers is discretionary MPS and multi-asset/multi-manager solutions.

Despite the intended increase in use, the overall number of DFMs that advisers work with once again fell, with the trend accelerating with the introduction of consumer duty. Advisers now work with an average of 1.7 DFMs, down from 2.2 last year.

Heather Hopkins said: “This year’s report highlights the competitive nature of investment solutions, with MPS providing an increasingly attractive route for the advice profession. Financial advice firms are experiencing some significant challenges with an onslaught of more regulatory change expected.”

This article first appeared on our sister publication Portfolio Adviser.

The term ‘shoehorning’ will ring bells with followers of regulation, who will recall the FCA’s keen focus on it in the Retail Distribution Review (RDR) of 2012.

Back then, the concern was that as advice and investment firms developed centralised investment propositions (CIPs), there would be issues around client suitability and poor outcomes.

There were concerns that firms could ‘churn’ clients, moving them from their existing investments into CIPs, and that additional costs could be incurred by clients being put into these new investments.

Now, with barely a month going by without at least one wealth manager or advice firm being snapped up by an aggregator or consolidator, there’s a real likelihood that the regulator could turn its spotlight onto these expanding firms.

Renewed focus

Under Consumer Duty rules, shoehorning will now be viewed with even more disdain than in the past by a regulator looking to make sure it’s on the front foot.

Back in February, St James’s Place – probably the largest vertically integrated advice firm in the UK – stated that ahead of Consumer Duty coming into force, there would be “aspects of the way we operate which will need to change in order to meet regulatory expectations”.

The firm added that the FCA was “expecting action, and where we identify this is required, we will respond to improve [the] client experience and reduce any risk of poor client outcomes”.

In recent days, SJP has announced a fundamental overhaul of pricing, and is now looking to increase the role of passives in its proposition.

Even the biggest firms will need to ensure that they can demonstrate that they have not shoehorned any clients.

Evidencing this is the case becomes much more difficult in a vertically integrated organisation growing rapidly via M&A.

Acquisition frenzy

Recent data from research firm NextWealth found that acquisitions of advice firms almost doubled in 2022.

Last year saw 101 deals, nearly twice the 54 inked in 2021. Interestingly, the deals in 2022 accounted for £48bn in assets under management (AUM), up by 85% from the £26bn the prior year.

Perspective Financial Group and Fairstone Group made the most acquisitions, with 20 and 13 purchases, respectively, followed by Kingswood (9), Atomos (formerly Sanlam) (8), and Progeny (7).

With this kind of growth within some firms, it will be vital that these businesses ensure clients are not shoehorned into products amid the frenzy of expansion.

And where owners or majority shareholders are private equity firms, businesses need to ensure that their owners’ laser-like focus on profit doesn’t detract from client suitability efforts.

Strategic decisions

Among the many factors and processes that may need to be addressed to help reduce the risk of shoehorning, wealth managers may want to consider cost.

Outsourcing a centralized investment proposition benefits from economies of scale, particularly when the ‘agent as client’ approach, which is covered in the FCA Handbook (COBS), is used.

Such an approach means that a firm doesn’t have to fund expensive back-office functions, like custody and trading desks. At the same time it facilitates a genuine whole-of-market approach.

The more competitive a firm’s overall fees are, the less chance it can be viewed as not offering its clients value for money.

This doesn’t mean there has to be a race to the bottom – the prevailing rhetoric is keen to emphasise value over price – but ensuring that its proposition is keenly priced could act as a robust part of a firm’s defences when it comes to demonstrating its approach.

Attractive pricing and operational independence aren’t necessarily a panacea, though; the regulator will be looking for comprehensive evidence that shoehorning isn’t occurring, not some quick fixes that only pay lip service .

This article was written for International Adviser by David Ogden, head of compliance at Sparrows Capital.