A small percentage of people opt to manage their own investments but for the majority who have funds to invest, they hand over this responsibility to the professionals.
For retirees, financial advisers will generally recommend an annuity, which will be on a linked investment service provider (LISP) platform, where they are faced with the choice of hundreds of funds and dozens of asset managers. This makes decisions on which asset manager or which mix of funds to invest in extremely difficult.
While an ever-increasing range of choice offers investors increased investment flexibility, it also puts a huge amount of pressure on the financial adviser, whose fund-selection advice can significantly affect retirees’ income.
David Lloyd, managing director for innovation at Liberty, believes that its new Bold Living Annuity product goes quite some way to alleviate this pressure, as once the mix of funds that get selected starts to produce a return, and the guarantee goes up, the pressure subsides.
“It helps restrict the doomsday scenario”, he says, referring to the financial adviser’s nightmare of a stock market crash which wipes out all the gains that have been made with retirees’ funds or, worse still, creates losses.
Clients, with their advisers, can now choose any mix of funds and change them at any time from a broad range of asset managers that LISP-style products offer with a Liberty high water mark guarantee on the returns that the mix of funds generates. As such, the financial adviser can sleep much easier at night, says Lloyd. Better still, he says, this comfort offsets the increased risks of higher-performing funds so allowing more top-performing funds to be selected.
“There is widespread acceptance that this product helps solve the key issue of living annuities” he says. This is because there is now an option to invest in hundreds of funds in any combination with the ability to switch without any fees and no change to the guarantee.
The combination of risk and guarantees does come at a cost, however. A quarterly high water mark guarantee is very valuable and can be prohibitively expensive. “For example, single funds that feature something similar can typically carry total costs of 3% to 4% per annum.”
Liberty has worked at reducing the cost, with a once off charge of 1% due on day one and there’s only a further charge if and when an investor’s aggregate return exceeds 14% in any year. If it does, then at the end of the year it deducts 20% of any growth in excess of the 14%. But, investors can switch off the guarantee at any time and when they do, if their return that year doesn’t exceed the 14%, then they pay nothing.
“This means full flexibility is maintained and investors only really pay for the performance guarantee once it becomes particularly valuable,” Lloyd says.
The best outcome for financial managers is to be able to pursue inflation-beating targets while being protected from major market downfalls and at the same time, to be able to switch funds.
This does not mean short-term prices and volatility can be avoided or that a long-term downturn will not affect investment returns. But it does limit the downward risk, which is important for retirees.
No matter their risk appetite, they have, in most cases, a limited income and their savings need protection. It also gives them back some control over their investment and allows them to leave a legacy.
This article was sponsored by Liberty.