Advisers may want to encourage risk-averse clients to reconsider their views on investing over the longer-term, particularly with people now spending up to a quarter of a century in retirement, M&G's Graeme Abell said.
Abell, director of nationals and networks for the group’s UK retail arm, said advisers are in a position to avert a crisis caused by customers’ reliance on “safer” investment options when saving for retirement.
Speaking at the Institute of Financial Planning (IFP) annual conference in Wales this week, Abell argued that, over a period of 23 years – the likely length of time spent in retirement – traditionally safe investment options such as gilts and cash should not be relied upon.
“There is a crisis looming that will see people simply running out of money,” he said.
With people spending longer in retirement, is it time to challenge risk-averse clients?
“The situation has been made worse by the fact that people have been stripped of their final salary pension schemes, and are facing inflation caused by quantitative easing and population growth.
“We need to be at about 3-3.5% real growth over a retirement period of about 23 years real to ensure that a client does not run out of money. But this is made all the more difficult for advisers as clients currently have no appetite for risk.”
To compound the problem, Abell said the Financial Services Authority had made disapproving noises regarding the poor returns achieved by advisers on behalf of clients who stated their low appetite for risk.
Abell explained that, if returns are considered across a 23-year investment period, equities carry the lowest downside risk of any of the asset classes – despite the fact that, according to modern portfolio theory, it is the most risky of all classes.
“This is where the art comes into advising around investment management,” he said. “If a portfolio is considered over this longer time period, the risk various asset classes pose is drastically altered.
“Advisers should be encouraging their clients to reconsider their approach to risk and managing their portfolio. They should be looking at investment options that would include, for example, corporate bonds and global equities over this longer time period.
“Traditionally we have been wedded to UK equities but this is another aspect of investment management advisers need to reassess,” he added.
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