Video Adviser attitudes report 2024 webinar

(00:00) Hello, and welcome to our session on the latest Adviser attitudes report, which looks at the investment trends you’re seeing in the advice market. I’m Lorna Blyth, Managing Director for Aegon UKs Investment Proposition, and in my role it’s vitally important that we have a keen eye on the investment trends that are shaping the market and we’re excited to share the findings of our latest research with you today. You’ll be pleased to know that today’s webinar qualifies for thirty minutes of structured continuing personal development. After this session you’ll be able to download a copy of the CPD certificate from the CPD hub at aegon.co.uk/cpd subject to verification.

(00:54) We’re delighted to share the fourth edition of our Adviser attitudes report, which collates the views of 200 advisers on a range of topics related to how they structure their investment business, investment trends, client behaviour and how they’re responding to recent economic challenges. As ever, our results are an interesting window into the wider economic climate and impact on investor behaviour. This year, in particular, we wanted to know how advisers’ clients were managing their finances during the rise in the cost of living. We were rewarded with some fascinating insights into how it’s affected investment strategies, particularly for those near or in retirement.

(01:44) A lot has happened since we last surveyed advisers in 2020 – the long tail of COVID, high inflation, the invasion of Ukraine, and the Kwasi Kwarteng ‘fiscal event’ – all contributing to put a squeeze on the nation’s finances. Inflation reached peaks not seen since the 1970s, with food and alcoholic beverages reaching an eye watering annual inflation rate of 19.2% in March 2023 compared with the overall rate for the consumer prices index including owner occupiers’ housing costs of 8.9%. On top of this, interest rates followed a similar upward trajectory, with the Bank of England rate reaching a high of 5.25% in August 2023, and it remains to be seen whether 2024 will see the reductions the market is expecting.

(02:43) With that context in mind, our research looked at advised investment propositions, investment strategies, cost and complexity, retirement patterns, cost-of-living crisis and responsible investments. I’ll talk you through some of our key findings today, and you can also download a copy of the full report at eagon.co.uk/adviserattitudesreport.

(03:16) Before we start, I just want to cover off the learning outcomes. After today’s session you’ll understand why advisers are increasingly outsourcing investment expertise in their business models. Will learn when advisers tend to use multi-asset funds vs model portfolios or discretionary fund managers, and with which client types. Examine the changes in retirement investment patterns.  And understand the impact the cost-of-living crisis, high interest rates and market volatility, and the impact this has had on client investment needs.

(03:55) So, before we delve into the detail, I just want to take a moment to touch on the key findings, from the report. Multi-asset strategies continue to dominate, both for accumulating and decumulating clients, with nine out of 10 advisers using them, and as we can see here, 25% of client assets are held in multi-asset funds, so a quarter. However, assets managed by discretionary fund managers saw the biggest increase – rising from 13% to 20% of assets under management compared to 2021.

(04:34) We also see a strong tendency towards investment strategies that outsource investment expertise in some way – be that governance, asset allocation or portfolio building. And this is leaving advisers more time to focus on their clients. Looking at the reasons for the continued popularity of multi-asset funds, Advisers still cite diversification as their main reason with 63% when asked to list their top three, with the ability to select risk-rated funds second at 45%, followed by asset allocation expertise at 35%.

(05:19) Turning to retirement income, despite a turbulent economic context, drawdown has remained the favoured option for 67% of retirees’ assets, while annuities were at 11% despite improved rates and an increased desire for certainty amid market volatility. Now given the market end economic uncertainty, it is unsurprising that 33% of advisers reported an increase in queries from clients since the cost-of-living crisis, with 58% of those coming from clients aged 55 or over.

(06:00) For advisers’ retiring clients, market volatility and the cost-of-living crisis impacted even the best laid retirement plans, with 53% of advisers seeing an increase in those opting to delay retirement. In addition, 32% saw an increase in requests to reduce retirement income.

(06:25) In the responsible investing arena, advisers have been enhancing their propositions in response to changing regulation, with 43% of firms revising their client factfinds and 23% increasing the number of environmental, social and governance options available. Hopefully, that gives you a flavour, now let's look at the findings in a little more detail…

(06:57) 75% of firms have a company-wide investment proposition, a CIP and 56% have a company-wide retirement proposition, CRP – this indicates that some of the firms that told us of their intention to introduce a centralised proposition for retirees in 2020 have now done so.

(07:20) In terms of how firms set up, maintain and monitor their fund ranges, there’s quite an even split across the various approaches, perhaps an indication of the tussle many firms face balancing risk and cost. 36% now use some form of external support in creating and governing their fund ranges – and this is likely due to the risk and costs associated with doing this in house.

07:55) By contrast, we’ve seen a few firms set up investment committees solely made up of members of their own firm since our last survey, and this is increase from 24% to 30%. However, slightly fewer firms are relying on one individual within the company to create and maintain their fund range – and that’s gone down from 30% to 29%. We may see the risks of relying on an individual within firms come to outweigh the benefits of this approach.

08:31) Since the introduction of Consumer Duty, the responses from advisers are quite interesting, given how far reaching the regulation is. In total, over half of firms have made changes as a result of the regulation, but the other half, 48% have made none. 31% said they’d changed their service offering, 29% said they’d changed their pricing, 14% had made changes to their target markets, while 4% changed their products

(09:05) Now, while, on the face of it, it might seem odd that few firms have made changes, this could be seen as a healthy picture as it suggests most firms, on reviewing their communication, charges and advice processes felt they only had to make minor changes to accommodate the new rules.

(09:28) We also asked advisers about the key factors they look at when assessing a fund’s quality. A demonstrable track record is clearly key for many, with past performance rates in the top three for 63% of advisers. With cost considerations followed closely at 62%. However, investment process, fund objectives, strategy and ethos all followed closely behind – showing that advisers also have a keen strong focus on fund design.

(10:06) On the topic of fund costs, we took the opportunity this year to ask more questions relating to this area – partly due to constraints placed on investors’ finances since the start of the rise in the cost of living. Most advisers felt the average fund cost was about right, but almost half felt it should reduce as they’re finding clients are less willing to pay for more expensive funds than in the past.

(10:34 ) This fairly even split perhaps recognises the fact that many fund providers have already done much to reduce their fund costs. And given such large numbers feel fund costs should reduce, it’s no surprise to see an increase in the use of passively managed funds relative to actively managed. When we last asked in 2020, the split was 68% active, 32% passive, and this compares with 63% active and 37% passive this year. This is very likely driven by increasing reluctance among investors to pay a premium for actively managed funds.

(11:23)  Turning now to how advisers match funds to particular client needs, the top two factors, advisers take into account when making recommendations, are risk appetite and capacity for loss, as you can see in the chart here. Factors such as the value of a client’s savings and investment knowledge all ranked lower in terms of importance when assessing suitability. It is interesting to note there’s greater emphasis this time round on clients’ savings goals, an increase from 36% to 49% and less on the value of their savings, a decrease from 28% to 21% since we last asked the question in 2020.

(12:18)  The results this year also revealed extensive use of outsourced investment expertise, with multi-asset funds remaining the most used investment strategy by advisers. Multi-asset funds made up 25% of assets under management in advised portfolios, compared to 20% in DFM portfolios, 20% in model portfolios, run fully in-house and 18% in model portfolios built using external expertise. Fewer advisers are using single strategy funds, only 12%. While stock-pickers are now a rare breed at 1%. However, it’s clear that advisers are considering multiple strategies when meeting client needs, with a fairly even spread across different client types.

(13:15) And, if we take multi-asset funds and DFMs with asset allocation and governance baked in, or the use of external researchers to help build model portfolios together, they amount to 63% of advised assets. The continued popularity of multi-asset funds is partly due to the fact that they’re the least expensive option, according to 53% of advisers, and therefore can be recommended to the majority of their clients.

(13:48) The rise in popularity of DFM-built portfolios, as mentioned earlier, is surprising, given an increasingly competitive and cost-conscious market, especially as 80% of advisers see them as the most expensive option and only a fraction of adviser firms have discretionary permissions at 16%. This year’s survey is perhaps the first, where we see the effects of MIFID II and PRIIPs regulation flowing through into adviser propositions.

(14:25) As we found in previous years, multi-asset strategies are by far the most popular investment strategy with retiring clients. This may well be due to their versatility and the ability to downgrade risk as clients move into and beyond retirement. This flexibility is seen as essential for those close to or already in retirement and has proved invaluable during the cost-of-living crisis.

(14:57) Advisers rank diversification as the top reason for using multi-asset funds, with the ability to select risk-rated funds second, followed by asset allocation expertise. Access to asset allocation expertise and diversified portfolios highlights the importance of a robust investment process. And the ease of understanding and ability to select risk-rated funds makes it easier for advisers to demonstrate client suitability.

(15:32) Multi-asset funds are also seen as much easier to use. In-house models often involve acquiring permissions from clients for every portfolio change, while advisers still retain disclosure responsibilities even where they've outsourced portfolio management to a DFM.

(15:56) Complexity of a client’s investment needs also influenced advisers’ decisions when making recommendations. Multi-asset funds or model portfolios were much more likely to be recommended to those with typical investment needs. And 41% of advisers said they were much more likely to recommend a DFM portfolio to those with complex investment needs. However, it’s important to note that around 40% of advisers didn’t see complexity of need as a relevant factor in the decision about the type of investment strategy to use.

(16;43) Given the difference in cost between multi-asset funds, models and DFM, we were keen to explore how these strategies were being used by advisers. Unsurprisingly, multi-asset funds are popular for clients with lower savings, with 60% being recommended to clients with savings of less than £100,000. And at the other end of the scale, 37% said they were more likely to use DFM portfolios for clients with savings of more than £500,000. However, again around half felt that the size of savings pot wasn’t relevant when selecting the type of investment strategy to use.

(17:37) Despite recent drops in inflation, the cost-of-living has increased demand for retirement advice, and remains a significant concern, particularly with those in their second 50, aged 55+. An overwhelming proportion of queries were from those who were already retired 18%, near retirement at 17%, due to retire in the next two years 20%, or retired but forced back into work at 3%, making the total queries from retired or nearly retired clients 58%. This is not surprising given that those who are no longer earning have more limited options when combatting a rise in the cost of living such as we’ve seen.

(18:27) We asked advisers what the most common queries they had were about. 35% of their clients wanted to review their investment performance, 24% wanted to review their retirement plans, 14% wanted to cash in their savings and 10% were concerned about risk. 9% wanted to reduce the amount they were saving. The most common challenges retiring clients face has remained similar to last time round, with 77% concerned about running out of money in retirement and 63% worried about how much income they might need. 33% say they need help choosing which strategy is best for them to create retirement income and the same number want to understand their investment options better.

(19:24) Interestingly, there’s been a sharp decrease in those concerned about consolidating pensions or transferring out of defined benefits schemes – from 15% in 2020 to just 3% in 2024. And there are a variety of reasons for this – changes that the FCA has introduced over recent years together with the business risk of undertaking this advice as well as falling transfer values as a result of higher interest rates.

(20:00) Advisers estimated that retirement advice would account for 58% of the assets they advise on In 2023, rising to 62% over the following three years this was bases on research carried out by NextWealth on our behalf. Retirement patterns have the potential to have a huge impact on adviser firms in the coming years.

(20:24) And as you can see from the table, advisers have reported some key changes in their retiring clients’ choices since rising prices started to affect their finances. 54% saw an increase in clients opting to delay retirement, 32% said they noticed an increase in those opting to reduce their retirement income, 22% saw a reduction in those opting to retire early and 46% saw an increase in those opting for annuities. These factors combined indicate a definite increase in caution among retiring clients since the start of the crisis, with a desire to postpone retirement, conserve future income or get greater certainty of income.

(21:20) We asked how advisers responded to the queries, and they told us overwhelmingly that they had urged clients to stick to their plan at 70%, with a minority 9% helping clients switch investments, change retirement plan at 7%, and 4% helped them to cash in savings.

(21:47) Looking at this in more detail, most still retire between 61 and 65 at 67% but 22% are now retiring between 66 and 70 compared with 15% in 2020. There’s also been a slight decrease in those retiring earlier from 12% to 10%. This continues a trend we’ve seen since we started these surveys of clients delaying retirement. It likely reflects general concerns about the affordability of retirement and the increase in the state pension age, which many rely on to supplement their retirement income. And if we look at when clients choose to retire; while many 45% still opt for the traditional route of retiring at a single point in time, that does leave half who choose a more fluid approach to retirement.

(22:46) 34% choose to transition into retirement by reducing hours or entering a period of semi-retirement. 6% retire with a view to re-entering the workforce at a later date, 10% intend to continue working indefinitely and 5% are still unsure what they will do.

(23:12) Drawdown is still by far the most dominant retirement strategy, with 67% of recently retired clients using this in one form or another. 33% are currently taking ad-hoc or regular income, while 20% have opted for drawdown but aren’t currently taking any income. And a further 14% are using drip-feed drawdown. There’s been a recent increase in the numbers using annuities, but perhaps not as much as we might have expected given recent market volatility and relatively attractive annuity rates. Those taking annuities increased from 8% in 2020 to 11% in 2024.

(23:59) There’s also been a suggested marginal increase in those cashing in their pension savings from 3% to 4% and slightly more people leaving their pension uncrystallised. This could be an early indication that some are having to cash in their pension savings to live, while others are reluctant to access their pension savings while the economic climate is so unstable.

(24: 28) Relatively few are choosing to inflation-proof their pensions, with the majority still using fixed withdrawal amounts. You might have expected the opposite given the sharp rise in the cost of living, but this is no doubt due to concerns about running out of money with many choosing to make lifestyle adjustments rather than immediately increasing their income.

(24:58) As we saw on the previous slide, there’s been a slight increase in recently retired clients taking annuities, Advisers appear to have also adapted their recommendations as a result of improvements in annuity rates. Half said they’d increased their use of annuities in retirement strategies, with 32% blending the use of annuities with drawdown while 18% are using them for the entirety of their clients’ pension pots. However, 44% say they’ve seen a similar amount of use and 6% don’t use annuities at all.

(25:37) While this does seem significant, it’s perhaps less remarkable when you take into account the considerable improvements we’ve seen in annuity rates following the Truss mini budget. If annuities were to have their day, you might argue it would be now, yet our data shows they still only make up around 11% of retiring clients’ assets. It remains to be seen if the rise in annuity use is simply a temporary blip, or whether it will reduce as and when annuity rates follow interest rates down, as they seem set to do this year. It does, however, demonstrate a strong desire for greater income certainty among current retiring clients where this is the cost-effective option.

(26:31) Turning our attention to responsible investments. 73% of firms have made changes to their offering or advice process to reflect the changing regulatory landscape. Only 27% of firms have made no changes. Over 40% said their firm had revised their client factfind to ask about ESG preferences. This is unsurprising given the requirement set out in MIFID II. And it’s likely the remainder of firms surveyed had already made changes. Almost a quarter said they’d increased the number of ESG options in their CIP. With 12% have taken the significant step to include ESG as standard within all recommended portfolios.

(27:30) Client understanding and limited ESG research remain issues for firms when discussing responsible investments with their clients. Only 5% of advisers were confident that their clients understand the options very well. 18% said their clients had some knowledge, 38% felt their clients understood ESG funds vaguely but further education was required, while 27% were not even aware there are differences between the ESG funds on offer.

(28:07) Specific issues that advisers face when selecting ESG investments are confusing research, this is according to 47% of advisers, poor performance relative to the broader market at 34%, lack of ESG asset classes were cited at 30%, and lack of information also at 30%, while 28% cited the restricted product range as a reason. Performance aside, which wars in Ukraine and the Middle East have played no small part in, we would expect future reports to show an improvement in the quality and clarity of research and fund-related communications following the introduction of Sustainable Disclosure Requirements. This should make it easier for consumers and advisers to navigate the ESG landscape.

(29:07) Advisers and investors have proven incredibly resilient over the past couple of years since our last survey, especially given how much has happened. Before we finish up, I just wanted to quickly summarise the key points from today, which have proved reassuringly consistent with previous years’ results.

(29:29) We see the trend of outsourcing within propositions continue, enabling advisers to focus on core purpose of managing clients’ wealth, as well as allowing them greater freedom to deliver value-for-money solutions. The continued popularity of risk-rated multi-asset funds demonstrates a desire by fund providers to provide investments that can deliver simple, all-in-one solutions that are easy for investors to understand, meet their investment goals, and represent value for money.

(30:05) Retirement patterns had already changed dramatically since Pension Freedoms were announced, but advisers are now faced with a huge wave of clients putting these into practice, and we see the demand for retirement advice continue to rise. Despite the recent turbulent economic backdrop, drawdown remains the favoured retirement income option; with annuities, despite increased usage and favourable rates, still languishing at only 11% of the market.

(30:37) We also see evidence that clients’ retirement behaviours are changing, with more than half of advisers reporting an increase in clients opting to delay retirement. It will be interesting to see in future reports if this change is driven by the cost-of-living crisis, or from clients choosing to stay longer in employment.

(31:00) Cost of living, interest rates and market volatility have combined to create significant turmoil for advised clients, particularly for those over the age of 55. We see this has also contributed to an increase in demand for advice. Advisers have reacted with characteristic cool-headedness, with the majority advising clients to stick to their plan.

(31:27) As always, advisers have met the challenges they’ve faced head on, using all the tools at their disposal to steady their clients’ nerves and adapting their propositions to keep up with challenging legislation, market conditions and client needs.

(31:48) I hope you’ve found our research helpful and look forward to working closely with you to help your clients live their best lives. You can download a copy of the full report at aegon.co.uk/adviserattitudesreport, and please don’t forget to also download a copy of the CPD certificate which can be found at aegon.co.uk/cpd. And finally, you can find out more about Aegon investments by visiting aegon.co.uk/investments. Thank you.