Investment pathways - coming soon to your advice process
Investment pathways are the FCA’s solution to the issue of drawdown consumers defaulting into cash, a problem revealed in the Retirement Outcomes Review findings. When it comes to non-advised, non-SIPP clients, the FCA’s desire to take action is understandable. Those who have been in workplace pensions with a default fund often move to a new product to access their benefits without advice and don’t comprehend the need to make their own investments, so end up in cash. The move to make cash an active decision and force people into some kind of investment as a default option is reasonable.
It’s when the new requirements go further that the need is more questionable. First, take your average non-advised SIPP client. They’ve made an active decision to choose the SIPP provider themselves, and are used to making their own investments. Why should the need change when they want to access their pension? It may well be that the FCA agree on this point – as evidenced by the feedback statement on non-workplace pensions that looks to extend the remit of pathways beyond drawdown.
Putting that to one side for a moment, one of the biggest issues I have with investment pathways is that, from 1 August next year, any adviser making a personal recommendation to a drawdown client will first have to consider the pathways before selecting any other investments.
This will include not only new clients entering drawdown for the first time, but any existing drawdown client who is making changes to their investments. This is a bit like the RU64 requirement that you have to consider a stakeholder pension before recommending a personal pension.
There will be an array of investment pathways available come August next year, and the requirement to consider the options is not influenced by whether the current drawdown provider offers them or not – so theoretically, there could be a need to look at many options. The saving grace may be the fact that the four pathway options are very basic, so if your client doesn’t fit neatly into one of them, it should be relatively easy to evidence that a tailored investment strategy is more appropriate.
In fact, you could argue that out of the four pathway options, only two of them will lead to any kind of investment pathway at all. Two of the options involve taking all the money out within the first five years – either as a withdrawal or to purchase an annuity – so having a higher proportion in cash or ‘cash-like funds’ will not be entirely inappropriate. The other two options involve leaving funds untouched for five years or starting to take out income in the next five years – but with no differential between leaving income untouched for five years or twenty years, or between taking 1% or 10%+ income a year.
What I find unnecessary is that advisers will be compelled to consider pathways at all. Advisers already make personal recommendations based on the client’s individual circumstances, which will be far more personalised than any investment pathway. If it does so happen that a pathway fits their objectives, then advisers would be able to recommend it without being forced to consider it and thus lengthening the advice process. Advised drawdown clients have not been identified as at high risk of defaulting into cash, so there is no issue to be resolved and this extra step just feels wholly unnecessary.