Guide to financial planning during Covid-19
june 2020
in association with
overview
After the fall: financial markets have yet to count the true costs of the coronavirus but opportunities are already emerging as the dust settles
New business as usual
RL360 has developed ‘The five (business) stages of Covid-19’ to maintain a high level of service for its advisers and make life as easy as it can for them during the global pandemic
retiring today
As clients on the cusp of retirement see falling share prices and wonder if their long-held plans to quit the 9 to 5 must be put on hold, Cherry Reynard weighs up the options
immunise your business in 10 steps
From clear communication to making the most of technology, International Adviser editor Kirsten Hastings has 10 tips to help IFAs protect their business against the virus
coronavirus | june 2020
After the fall
Financial markets have yet to count the costs of Covid-19 but opportunities are already emerging as the dust settles
The coronavirus outbreak has wrought a seismic shock on the global economy that the world has yet to quantify. Financial markets will need to digest a swathe of bad news over the coming months. Investors must also consider the new economic order when we are out the other side – higher government debt, new working patterns, sluggish growth. Where have been the places to hide in the recent rout? And will they continue to protect investors as the world recalibrates?
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Winners and losers
Alternative options
‘While lofty predictions about a changing world may be premature at this stage, it seems likely there will be an altered world post-Covid’
The absolute return sector was its usual mixed bag. Overall, the average fund in the sector has dipped 5% over the past three months, which puts them comfortably ahead of most equity funds, but this masks considerable variation underneath. There was a 44.5% gap between the top and bottom-performing funds. The top-performing funds came in all guises: macro, long/short, currency and equity market neutral. Apart from getting their analysis right, there was little to connect them and it remains difficult to isolate the likely winners. Commercial property, usually a more defensive asset, has struggled in this environment. In many cases landlords have been forced to take a hit as tenants have lost their revenues. Even if industrial and office properties have held up relatively well it may be there is more pain to come in the sector as the fallout from the pandemic becomes clear. Alternative property options – infrastructure, healthcare property and renewable energy infrastructure – have proved more resilient and have more certainty of revenues looking into the post-Covid world.
For equity markets, it turns out, the rules have not been rewritten. Markets have, in aggregate, recovered and amply demonstrated the importance of staying invested. Having initially dropped by over 30%, the FTSE 100 has recovered by almost 20% over the past month. This recovery has come in spite of a backdrop that is still highly uncertain, with little visibility on corporate earnings. However, there have been some notable casualties – leisure, hotels, commercial property, the oil majors and luxury retail have all taken a hit, which may be terminal in some cases. The crisis has exposed those companies living on the edge – over distributing dividends, supporting high levels of debt, with structurally challenged business models. In many cases, it has simply accelerated longer-term trends, such as the rise of ecommerce to challenge a fading high street, the digitisation trend or the energy transition. Even in the bleakest points of the crisis, there have been places to hide. The technology sector, for example, has been buoyant. The Nasdaq is back to its level in January, while Amazon’s share price is up almost 25% over the past 12 months, Netflix is up 20% while Microsoft is up 44% (source: Refinitiv, to 13 May). The healthcare sector has also been strong. Diagnostics giant Roche has seen its share price rise on high demand for its testing expertise, while other biotechnology and pharmaceutical companies have also been strong. The next question will be how the landscape looks from here. While lofty predictions about a changing world may be premature at this stage, it seems likely that there will be an altered world post-Covid. Will companies be willing to pay for expensive offices or international travel as bosses realise that teleconferences are just as effective? Have we hit peak oil demand? Will the inclusion of environmental, social and governance considerations into a portfolio become even more of a priority for investors? They may find that many companies do not simply bounce back, but now face permanent decline. Some reappraisal of the equity landscape will be necessary.
initial fall of ftse 100 after lockdown
-30%
recovery during past month
+20%
netflix
AMAZON
+25%
microsoft
+44%
These are unusual times and investors need to assess a changed landscape as the repercussions of the outbreak are felt across the global economy. However, opportunities are emerging as the dust settles.
Fixed income
alternatives
Reappraising the landscape
Higher quality government bonds did their job during the crisis, protecting capital in a difficult market. However, there was a significant sell-off in corporate bonds as investors anticipated higher defaults. Any bond with a hint of risk – notably emerging markets and high-yield bonds – suffered disproportionately as investors moved away from risk assets. It was a difficult environment to navigate for many active managers. Government bonds had looked poor value prior to the crisis and the next move in interest rates looked likely to be up rather than down. As such, many bond managers had moved into higher-risk assets to achieve an income and were wrong-footed by the pandemic. Only 13 funds in the IA strategic bond sector have delivered a positive performance over the past three months, with the average fund 4.1% lower (source: Trustnet, to 13 May). However, it appears to have opened up more opportunities in fixed-income markets. Corporate bonds had been very expensive, but spreads have widened considerably. Certainly, defaults will increase, but investors are now better compensated for the risk. This is in notable contrast to government bonds, where yields have looked stretched for some time and it is difficult to see how much lower they could go. This may be a more fertile environment for active managers.
The world has had a rough ride recently, there’s no denying it. The ubiquitous Covid-19 has changed every aspect of our lives and RL360 and the advisers we work with are no exception. For everyone, the weeks since the end of March have been about demonstrating resilience as we all find new ways to live and do business. RL360 has put together a raft of measures to help the advisers we work with – our aim has been to make life easier in difficult circumstances. We’ve all been through a lot to get to the point we’re at now, where we’re able to take stock of what we’ve actually done to try to ensure we maintain a high level of service for our advisers and make life as easy as we can for them. We’ve dubbed the process of getting to that point ‘The five (business) stages of Covid-19’.
So, what have we actually done?
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As previously mentioned, it’s only now, while we’re in the NBAU period, that we are really able to look back in detail at the steps we have taken to try to ensure the connection between RL360 and the advisers we work with is maintained as best as it can be in some very challenging circumstances.
previous article
The five (business) stages of Covid-19
We’ve harnessed technology to provide some meaningful flexibility around our processes.
‘RL360 has put together a raft of measures to help the advisers we work with – our aim has been to make life easier in difficult circumstances’
As the global pandemic rapped its unwelcome knuckles on the door of every country in which RL360 operates, we joined the rest of the world in an unsettling period in which we tried to plan for an eventuality we didn’t yet understand, both on a human and a business level.
It didn’t take too long, however, to acknowledge the basics of what was required of us. Like everybody, RL360 had to go home and stay home. Understanding this allowed us to move quickly on to the next stage.
The adaptation stage involved getting ourselves up and running, at home, in order to be able to effectively carry out business. This was a practical stage, involving lots of IT work and a reassessment/acceptance in all quarters about what our working practices would look like for the foreseeable future.
Once we’d adapted on a practical level (with all credit to our staff and in particular our hard-working IT team), we then moved on to perhaps the most frenzied period – a combination of bedding in and considering what advisers needed from us in these new and uncertain times. It was important to keep the lines of communication open.
This is the ‘getting on with it’ stage. Wherever possible, we’ve adapted our processes to make it easier for advisers to do business. We are living in a strange new world but now, having passed through the stages above, we are in a position to acknowledge that and get our heads down to the job at hand. RL360 is working differently and we are aiming to provide the same high level of service we have always provided to advisers and our planholders.
Understanding the difficulties advisers are experiencing as a result of not being able to meet their clients face to face has been key and it is on this that technology has really come into its own. We introduced a series of measures that would allow some all-important flexibility, particularly around our requirements for wet signatures and identification documents. We fast-tracked the introduction of our system to accept digital signatures through DocuSign and AdobeSign. And we’ve converted all of our documents to type in PDF for quicker completion. All of these measures are in place as long as the pandemic remains a barrier to face-to-face contact, after which they will be reviewed. In some cases, the way we work may have been changed forever.
We launched new functionality within our illustration system for our Regular Savings Plan which allows advisers to model specific illustrations for those clients looking to save for their retirement or their children’s future education needs. The scenario planner is simple and intuitive to use, and can be completely customised to meet each client’s specific requirements. There is lots of flexibility that allows advisers to play around with different scenarios, before settling on the preferred solution. This direct integration into our illustration system is saving advisers time and making the illustration more personalised and relevant to their client’s needs.
We’ve introduced new tools.
Reminding advisers about our existing services that could make their life easier at the moment was a no-brainer. Our paperless Online Service Centre (OSC) provides a one-stop-shop for all of their planning and client-servicing needs. Some advisers are already using the OSC while those who aren’t have been signposted to the sign-up page on our website. Using our OSC, advisers can submit applications online, access valuations, deal and switch online, access commission statements, research funds and keep up to date with all their clients’ plans with a handy dashboard. Whether they want to prepare valuations for their clients, carry out switches and deals or produce an illustration, everything is available at the click of a few buttons. If you’re an adviser who already receives commission and fee statements from us, you can access weekly data download files (CSV format) on the OSC.
We’ve highlighted the useful services we already had in place.
Keeping in touch with our advisers to let them know what we’re doing and to provide some support has been key. As has been often said over these past couple of months, we’re all in this together. We’ve regularly contacted our advisers with tips on how to deal with worried clients facing difficult market conditions and kept them up to date with our responses to the Covid-19 pandemic. Additionally, we’ve made greater use of technology such as Zoom to contact our advisers and, importantly, to deliver our usual technical, product and fund training.
We’ve kept in touch.
Looking to the future
So, while making our way through the Five Stages was, as it was for everyone in the industry, a challenging process, we believe we have learned from it and have developed a stronger relationship with advisers. One that we hope we will be able to build on in the future, as we navigate whatever else Covid-19 has to throw at us and beyond.
New business as usual (NBAU)
understanding
adaptation
Limbo
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making it work
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International Adviser editor Kirsten Hastings talks to RL360 chief executive David Kneeshaw about the impact Covid-19 is having on the industry and how RL360 has adapted to meet the challenges.
Retiring today
Cherry Reynard looks at the options for clients on the cusp of retirement during these turbulent times
Sequence risk
‘Short-term preservation of capital should not trump long-term preservation of wealth’
Be prepared
Minimising volatility
After 10 years, a pot of £225,000 would be worth
£269,219
1.
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Take a break
2.
It's all in the timing
3.
Adjust your expectations
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The first option, and perhaps the most obvious, is just to leave the pension pot alone, using other sources of income until markets recover. It may be possible to boost income with part-time work, rental income or by deferring some major spending plans. Most advisers suggest people enter retirement with around six months’ worth of expenses in cash to cover this type of eventuality. Even where retirees have been in drawdown for many years, advisers generally suggest they take a pause on income withdrawals during market volatility to avoid the effects of ‘pound-cost ravaging’. Withdrawals will have a disproportionate impact in declining markets and if a retiree has the financial flexibility to hold on, it is a sensible option.
The timing of any annuity purchase will also be important. With interest rates at record lows, this is not a great time to buy an annuity. Any deferral will boost income over the longer term. The same is true for the state pension. The state pension increases by the equivalent of 1% for every 9 weeks it is deferred. This works out as just under 5.8% for every 52 weeks.
That said, if other sources of income have dried up in these Covid-hit times, retirees may just have to accept that they will need to adjust their retirement expectations. If this is the case, they will need to keep a reasonable weighting in equities to participate in any recovery and protect their portfolio against inflation. They should also try and limit the income they take out of their portfolio, so rein in some spending plans. The 10-year gilt yield is currently just over 0.2%, meaning most retirees in drawdown will need some allocation to equities to generate an income and keep their portfolio ahead of inflation. They will need to weather some volatility today and in the future. They key is to be prepared.
For those clients on the cusp of retirement, the recent disruption in financial markets is particularly unsettling. They may have looked at falling share prices and wondered whether their long-held plans to quit the 9 to 5 would need to be put on hold. The situation is not necessarily a game-changer, but needs to be handled carefully.
The fears of aspiring retirees are not unfounded. Stock market volatility around the point of retirement can be more damaging than at other times. So-called ‘sequence risk’ shows that it is not just the level of returns but the order in which those returns happen that influences the longer term value of a retirement pot. Someone who enjoys strong growth in the early years of retirement – when their pension pot is larger - will do much better in the longer term than someone whose pot is depleted in the early years. Research from Aegon has put this into numbers: it looked at a retiree with a drawdown pot of £225,000, taking an income of £13,600 each year and calculated how the stock market would influence their returns over the next decade. It showed some significant differences: had they invested in January 1995, just before the start of a strong bull run for markets, they would have a pension worth £269,219 at the end of the 10-year period. Someone who invested five years later at the market peak in early 2000 would have ended up with just £114,303 10 years later.
This will have a major impact on the level of income that can be generated or, perhaps more importantly, when the money runs out. Minimising market volatility at the point of retirement and in the subsequent few years should be a priority. Most well-managed retirement portfolios will have taken this risk into account and should have been sufficiently diversified not to have felt the full force of market turmoil. In this crisis, government bonds have fared well, along with other assets such as gold, some strategic bond and targeted absolute return funds and cash. However, even with a well-diversified portfolio, there is a chance that portfolios will have been affected by market turmoil. Here, retirees need to guard against any instinct to move wholesale into safe haven assets in response to the volatility. Those who had switched into government bonds or cash at the height of market volatility in March would have missed out on a near 20% recovery in markets. Short-term preservation of capital should not trump long-term preservation of real wealth. This is particularly true with higher weightings in cash. Almost all retirement goals require beating inflation, which won’t happen if retirees hold too much in cash.
Investors have a number of tools at their disposal to lessen the impact of market volatility in the short-term. Retirees may not be able to control markets, but they can control how much they withdraw in the first few years, how much they are spending and when they take their state pension.
The same fund would be worth
£114,303
pension Invested in Jan 1995 before bull run
Invested at market peak in 2000
Top 10 tips for immunising your business
From clear communication to making the most of technology, editor of International Adviser Kirsten Hastings has 10 tips to help IFAs protect their business against Covid-19
Too much generic information is unhelpful to clients and can leave them more confused or uncertain.
Make communication meaningful
Those approaching retirement will need more personal support than clients in the accumulation phase. Also those working in higher-risk jobs or with underlying health issues.
Prioritise client segments
Uncertainty can make people more risk-averse and want to exit higher-risk investments. But the risk rating of portfolios can also change - so make sure clients are still invested in suitable portfolios and asset classes.
Risk is an ever-changing concept
There are a lot of superstitions around talking about death, but failing to make plans now can leave loved ones suffering later. Wills need to be discussed, written and updated.
Important conversations
The outbreak has forced many businesses, who have been behind the technology curve, to up their respective games. The solutions available may seem overwhelming, but it is worth trialling and seeking out recommendations. One size does not fit all – and data security is important – but investing in technology now will pay dividends later.
Peer recommendations
Generating new business is top of mind for many advisers. But with no real networking opportunities, personal recommendations can go a long way. Satisfied clients are an invaluable source of contacts and leads.
Business building
Many product providers have in-house technical expertise, which can be a huge benefit to financial advisers. Do not be reluctant to use them.
Sources of knowledge
The rush to adopt technology in the Covid-19 world will not disappear once a vaccine has been produced and the world returns to some semblance of normal. Moving forward, video calls and digital signatures will be the norm. Failing to adopt technology now will only mean businesses suffer later. The efficiency savings can be staggering.
Hybrid model
Clients will be worried about their jobs and ability to continue paying premiums. Knowing which sectors clients work in will help identify those at risk of redundancy or furlough. In addition, understanding the terms and conditions of their savings vehicles and contacting the product providers could uncover solutions should they struggle to continue to pay their premiums.
Finding solutions
Market shocks create pockets of opportunity for investors. Clients with the means and appropriate risk appetite could take advantage of the discount applied to some sectors and asset classes and put more money to work for them.
Opportunity knocks
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