Advisers are being urged to review their business models following new evidence that investors are moving away from traditional assets and piling into property and cash.
Data compiled by EY shows that cash deposits saw a 17 per cent compound annual growth rate in new business flows between 2010 and 2014. In 2010, new business flows were £45.2bn, which climbed to £84.6bn by 2014.
Investment real estate saw a compound annual growth rate of 12 per cent over the same period, with new business flows rising from £36.9bn in 2010 to £51.8bn in 2014.
New business flows of traditional IFA products have fallen over the same period, however.
Stocks and shares Isas saw a compound annual growth rate of -9 per cent, with new business declining from £27.4bn in 2010 to £19bn last year. Bonds fell from £16.2bn in 2010 to £7.3bn in 2014, a compound annual growth rate of -18 per cent
EY says this situation poses major challenges for advisers and life and pensions providers.
EY partner and head of financial services strategy Penney Frohling says: “The majority of consumers are increasingly opting out of the investment sector. That means the long-term saving industry is unable to advise on the majority of a given consumer’s portfolio.”
Threesixty managing director Phil Young says the tougher limits on pensions tax relief are pushing IFA clients away from pensions towards alternative assets.
He says: “Peer-to-peer lending is creeping up the agenda for a lot of people as an alternative to cash.
“Advisers will at least need to start having an opinion on investments such as peer-to-peer lending that have historically been outside of financial services, because their clients are going to ask them about it.”
Adapt to demand
The Consulting Consortium director of advisory services Colin Wilcox says advisers should be well placed to adapt to changing demand.
He says: “People are moving towards ‘more cautious’ asset classes but do they understand the risks and benefits of their choices?
“It shouldn’t be difficult for the market to adjust and develop products with a greater exposure to cash and property if demand is there.
“Risks remain for consumers regardless of the asset class selected. They need to appreciate the long-term prospects for different asset classes and all the risks that arise, and advisers are well placed to provide that support.”
Page Russell director Tim Page says the shift in investing patterns has prompted his firm to adopt a financial planning model. He says: “About five years ago we spotted that increasingly clients were asking the question: ‘Should I keep my money invested or go for buy-to-let?’
“Wrappable assets are shrinking as a proportion of savings and the answer is to provide a financial planning service for a fee rather than charge as a percentage of assets under management.
“If you are only remunerated by advising on certain assets, then clearly you will become increasingly conflicted when clients are looking at other areas such as property. A lot of advisers haven’t woken up to this yet, but it will be a bigger influence in a shift towards fixed fees than any regulatory change.”
But Hargreaves Lansdown senior analyst Laith Khalaf argues traditional investments remain popular.
He says: “Commercial property has seen very strong inflows over the last couple of years, but so have equity income funds. Both are indicative of investors looking for yield in the low interest rate environment.
“The EY data only gives a snapshot comparison of 2010 and 2014, and the latter was not a great year for stocks and shares Isas for a number of reasons. For example, more people were being auto-enrolled into a workplace pension which may have diverted some money.
“If you take a step back and look at Isas as a whole, they have been extremely successful.”
But Khalaf adds the increase in cash holdings shown in the data suggests consumers are underinvested.
He says: “There are certainly opportunities in the cash space and we may see more retail cash offerings through advisers and platforms.”
Pension freedoms
The move to property and cash may be exacerbated by Chancellor George Osborne’s pension freedom reforms, which came into force in April.
Ahead of the freedoms being implemented, fears were rife that retirees would take money out of pensions and put it in the assets they understand best: cash and property.
Council of Mortgage Lenders data shows an increase in gross buy-to-let lending for house purchase since June. Between January and May, monthly lending for purchase ranged from £1bn to £1.2bn, with year-on-year increases of between 11 and 33 per cent.
In June, monthly lending rose to £1.4bn, a 40 per cent year-on-year increase. And in July lending was £1.6bn, up 33 per cent year-on-year. Lending totalled £1.4bn in August, the last month for which data is available, which is up 40 per cent year-on-year.
The CML says year-on-year growth in buy-to-let lending was strong before the freedoms came in but has increased further since June.
However, a spokesman said it is too early to draw a link between higher lending and the pension freedoms.
Page says: “Property is the only share class that baby boomers have seen do well for them in their adult lives, so buy-to-let makes sense to them and it is hard to argue with that experience.”
Specialist broker The Buy to Let Business managing director Ying Tan says: “The pension freedoms will have had an impact, but the main reason volumes have increased this year is because the economics of demand and supply remain very strong.”
Young says advisers need a strategy for buy-to-let.
He adds: “It is not necessarily a good idea for advisers to start advising on it, but a lot of clients will have a buy-to-let property in their portfolio and advisers need to think about how they deal with it.
“Are you going to advise on it, do you include it in reporting, and do you take it into consideration for asset allocation? Do you charge for that, and if so how much, given that you’re not advising on it?”
Expert view
The long-term savings industry has been altered in recent years as sweeping change has come in with the RDR and the pensions freedoms.
The constant stream of regulation continues to profoundly change the rules of the game for life and pensions providers, and the advantage they once enjoyed has to some extent been diluted, with others such as asset managers entering the space.
Capital requirements under Solvency II are also challenging the viability of most of the guaranteed products in the market. The result is many traditional revenue pools are not as lucrative as they once were, or even viable. Non-capital intensive products (such as mutual funds and exchange traded funds) are attracting the majority of new business flows, but have increasingly lower margins.
Conversely, traditional life and pensions products with higher margins have not grown fast enough over the last four years, with the exception of workplace pensions.
To add to the challenge, customers are choosing to keep more of their assets in cash or invest in property rather than saving through more traditional financial vehicles.
At least 50 per cent of UK households’ investment assets are allocated to these asset classes.
The bottom line: many consumers are increasingly opting out of the investment sector. This is occurring at a time when most life and pensions players, banks, and advisers are investing an increasing amount of scarce resources into new platforms or IT infrastructure.
The current environment poses very serious questions around their ability to make any meaningful returns on these investments. The winners in this environment will be those players who shift rapidly from the legacy product-led culture to a relentlessly customer-led approach driven by deep insight and analysis into customer needs.
Penney Frohling is partner and head of financial services strategy at EY