I've got disappointing news if you're reading this in the hope that it's in relation to a motivational podcast series! However, I do think it's a rather apt title to describe where we are right now given the ongoing cost of living crisis, heightened market volatility and the relentless rate of regulatory change headlined by the Consumer Duty and its focus on being more proactive in the pursuit of good customer outcomes.
And I think this is where the pertinent challenge of today lies for advice firms; articulating the value attributed to these good outcomes. If I was an adviser, I think I'd be starting to feel a little miffed with the rallying cry to comply with the Consumer Duty. For most advice firms, telling you to put your clients at the centre of everything you do is preaching to the converted, but the key issue is how do you evidence that you put clients at the heart of your business? I think in that context, the Consumer Duty becomes more about the transparency of your decision making, rather than the need to implement additional processes.
The era of ‘spikeflation'
So far in 2023, we've moved from the stagflation phase of the business cycle (where growth is falling but inflation is still rising) into this new phase which is being coined ‘spikeflation'. This is categorised by periodic spikes in inflation caused by a range of structural drivers such as geopolitical risk and Government fiscal policy intervention.
A key question for advice firms is ‘how robust are your products, services and processes against this particular backdrop'?
Last autumn, we saw a lot of switching activity in the market, including advised clients who cashed out and are possibly still in cash now. Why did they move? Perhaps it's a small fund or perhaps the client's ultra-cautious. There may be a number of valid reasons, but in many cases it resulted from fear and emotion kicking in and going against the plan.
Guiding your clients through volatility
Getting your clients to stick to their long-term plan can be something which allows you to demonstrate ongoing value and I'll use the following chart to illustrate this point:
Source: Lipper, as at 31 December 2022. Past performance isn't a guide to the future. Prices can go down as well as up. Investment returns may fluctuate and aren't guaranteed, so clients could get back less than the amount paid in.
This is showing the last seven calendar years and is ranking different asset classes based on their annual performance numbers. There's a number of immediate conclusions to draw from this. The first is that it looks truly horrific and that's coming from someone who enjoys the visualisation of investment data! More importantly, it illustrates how hard it is to pick a winner.
Let's take 2020 as an example. It's hard to think that the beginning of Covid global lockdowns and era of panic buying toilet roll was over three years ago. But the macro conditions were very different then to what they are today. 2020 saw some of the wildest market volatility since the global financial crisis and was very much a disinflationary backdrop which benefited tech heavy global stocks. Government bonds also did well. The investments that didn't fare as well were those inflation-hedging assets such as commodities and commercial property. We saw a lot of switching activity in 2020 off the back of these short-term market moves and not just clients switching into cash. There was evidence of clients being switched out of broadly diversified multi-asset solutions into more basic global equity and government bond multi-asset solutions.
However, look what happened over 2021 and 2022. As inflation started to pick up, those inflation hedging assets rose towards the top of the pile as you'd expect, and the winners were those that lost in the short-term over 2020 during very specific conditions. In hindsight, you could argue that the smart thing would have been to remain broadly diversified, trust the process and perhaps focus on engaging with clients around periods of heightened volatility.
So where am I going with all of this in respect of Consumer Duty?
Well, making changes to your clients' investment strategies off the back of short-term market fluctuations isn't part of the long-term plan and that's particularly important in the context of having the right product, services and processes in place to address your clients' needs front and centre. Secondly, supporting your clients around periods of market turbulence is an excellent way to demonstrate value because it ultimately improves their chances of success by getting them to stick with the long-term plan you've worked hard to put in place.
Finally, all of this highlights how this new package of Consumer Duty principles, cross-cutting rules and detailed expectations of conduct go way much further than simple tick box compliance in delivering tangible value to your clients.
For support ahead of the Consumer Duty, visit the Royal London Consumer duty hub.
To find out more about investing with Royal London, explore the Governed Range.