In this Retirement Planner inquiry, Helen Morrissey asks what must happen in order to raise awareness of unit-linked guarantees
Unit-linked guarantees can be an important way of protecting clients' retirement assets. These products give investors the ability to benefit from stock market performance while also limiting downside through the use of guarantees.
But despite the considerable benefits of utilising these products as part of a retirement planning strategy, they remain on the periphery of the UK retirement market.
While unit-linked guarantees have their fair share of supporters, they have also been accused of being overly complicated by many advisers. Others have labelled the cost of the guarantee as too high. Many advisers have also questioned the commitment of providers operating in this space.
However, despite these difficulties the unit-linked guarantee market is not dead and buried. MetLife and Aegon remain active in the market, with the latter having launched three new products as recently as June. So what does the future hold for the unit-linked guarantee market?
Lack of understanding
We sent out an online questionnaire to Retirement Planner readers to gauge their sentiments about the unit-linked guarantee market. We received 107 responses.
The first question we asked was what proportion of advisers recommend unit-linked guarantees to their clients. Of those who responded, only 34% said they recommend these products (see chart one).
Such a result demonstrates the need for increased adviser education, according to Colin Bell, Aegon's product director, unit-linked guarantees - Europe. "We did find the proportion of advisers yet to start recommending unit-linked guarantees slightly surprising. It demonstrates that there remains a large part of the market we need to convince of the merits of these products. We need to redouble our efforts in educating advisers."
There is a real need for increased adviser education. Of those advisers who did not recommend these -products, 32% said it was because they did not understand them. Many felt more training was needed, while others asked for increased engagement with providers. While this lack of understanding is a major reason why advisers have decided not to recommend these products, there are other factors at play.
The perceived cost and complexity of these products have often been pointed out as potential drawbacks and the results of this survey prove nothing has changed.
According to survey participants, the cost of unit-linked guarantees was chosen by 50% of advisers as a reason why they don't recommend these products, while 28% said they found the products too complicated (see chart two).
Bob Bullivant, CEO of Annuity Direct, is one adviser who remains sceptical about the appeal of unit-linked guarantees.
He says: "We talk about unit-linked guarantees a lot, but most clients are just not prepared to take the risk. The income they get from them is often lower than they would get from an annuity and they just can't afford to do that.
"We have always looked at using a combination of annuity and income drawdown rather than using a unit-linked guarantee. For instance, you can go for an annuity alongside a low-cost SIPP with passive funds. That way you can really take control over the charges."
Bell says providers will need to work more closely with advisers to make sure they understand the products more thoroughly. But he adds it would be difficult to see how the design of these products could be simplified much further.
"There is still concern about the cost of the guarantee. The value of it isn't always that easy to see. We need to make sure that we explain the value of the guarantee so that people understand it.
"As it stands, it is difficult to see how the design of these products can be made much simpler. What we need to work out are simpler ways of explaining how the risk management process of these products work."
Key selling points
While there are concerns about unit-linked guarantees, it is also fair to say they have plenty of support. Even Bullivant agrees that in some cases, these products can prove a good choice for clients.
"Where these products are useful is when you have a client who has a good DB scheme and an AVC fund that they can afford to take some risk with."
We asked survey participants recommending unit-linked guarantees to their clients to explain the circumstances in which these products would be recommended.
Almost half (44%) said they would use the products for those clients in need of some kind on income guarantee. A further 41% said they would use them for cautious clients (see chart three).
We also asked the advisers to tell us more about what type of clients they would recommend these products for. For instance, does the cost of these products mean they are only suitable for high net worth clients? It would seem not, as 63% said they would use these products for clients with less than £100,000 in assets (see chart four).
When asked to explain their answer, one adviser said clients of any asset size could benefit from these products, but those with less than £100,000 in assets would be more greatly affected by any losses.
As complexity is a common criticism levied at these products, we asked those advisers currently recommending unit-linked guarantees to say whether they felt these products were unnecessarily complicated. A resounding 71% said they didn't feel unit-linked guarantees were complicated.
We then went on to ask them whether they felt they had a good understanding of the unit-linked guarantee market and how they fit into the market place. Almost all of the advisers (97%) recommending these products said that they did feel they had a good understanding.
So, it would seem that while unit-linked guarantees certainly have a part to play in the UK retirement market adviser, opinion remains polarised.
While the concept of enabling clients to benefit from market upside while offering downside protection is a good one, concerns over the cost and complexity of these products remain.
If unit-linked guarantees are to really take off, we must see providers increasing their engagement with the adviser community to make sure they understand how these products work and how they can benefit their clients.
Chart One: Do you recommend unit linked guarantees to your clients?
66% - No
34% - Yes
Chart Two: Why don't you recommend unit linked guarantees?
50% - They are expensive
32% - I don't understand enough about them
28% - They are overly complex
18% - Lack of provider commitment
Chart Three: In what circumstances would you consider recommending unit linked guarantees?
44% - Capital/income guarantees
41% - Cautious clients
26% - Elderly clients
9% - Risk tolerant appropriate
Chart Four: Which types of clients would you consider unit linked guarantees for?
68% - Those with less than £100,000 in assets
28% - Those with between £100,000 and £250,000 in assets
10% - Those with between £250,000 and £500,000 in assets
3% - Those with more than £500,000 in assets
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