Mon, 12/05/2014 - 14:01
The UK is at a retirement crossroads, with over half (54 per cent) of Britons admitting to not having financial goals and of those that do nearly two thirds (60 per cent) do not have a plan in place to reach them.
One in three (33 per cent) Britons don't have a good understanding of the annual income they will need to live comfortably in retirement.
Despite the government’s dramatic changes to retirement planning being welcomed by the public and savings industry, the survey, commissioned by Natixis Global Asset Management, found that, in reality, investors may be unprepared to take full advantage of the reforms.
Three in four (79 per cent) investors say they lack strong investment knowledge, three quarters (75 per cent) prefer to rely on ‘gut feeling’ when making investment decisions, and three in four (74 per cent) believe their own home is a better investment than the stock market.
Nearly half (47 per cent) have little or no knowledge of investments that can produce a stable income at retirement and over half (61 per cent) have little or no knowledge of alternative investment strategies which can produce returns uncorrelated to broader markets. Instead, the majority of investors (85 per cent) prefer to stick with investments they understand.
The economy is still weighing heavily on UK investors: 82 per cent fear the effects of inflation, 61 per cent worry about rising interest rates, 79 per cent cite concern about the UK government’s financial standing and 83 per cent worry about global and economic uncertainty. Sixty seven per cent say that market volatility undermines their ability to reach their savings and retirement goals.
These fears have led investors to choose safety over performance (83 per cent). Nearly three quarters (70 per cent) will only take minimal investment risk, even if it means sacrificing returns
Over three quarters (77 per cent) of 18-32 year olds are also choosing safety over performance; leading to younger generations missing out on opportunities to grow their savings pots over the long-term.
“This represents a huge responsibility for the investment management industry,” says Chris Jackson, head of UK retail, Natixis Global Asset Management. “Working with financial advisors and other service providers, we can help educate UK investors on what greater flexibility, as introduced by the pension reforms, can mean for their own retirement planning and how effective portfolio construction measured against personal benchmarks can help them to better meet their retirement goals.”
There is evidence the tide of investor behaviour is beginning to turn in one important way: how investors are defining success.
The vast majority of Britons are defining investment success in personal terms. Investors in the UK are nearly four times as likely to define success in terms of protecting their principal and avoiding losses (46 per cent) and more than twice as likely to define it in terms of achieving long term investment goals (27 per cent) than they are to define success in terms of outperforming the market (13 per cent).
“This marks a sea change in the way the asset management industry approaches investors,” says Jackson. “Our industry needs to embrace a new way of thinking about performance and deliver the solutions that can help investors construct the portfolios they need to meet their personal goals.”
Seventy-six per cent of UK investors say they would be happy to achieve their investment goals over a year even if they underperformed the market, 73 per cent are willing to set a target return that is independent of overall market returns, and 60 per cent worry more about the risk of not achieving their investment goals than the risk of not beating the benchmark.
With 64 per cent of UK investors, asset growth is increasingly becoming a priority over simply protecting capital (46 per cent are reducing the levels of cash investments in their portfolios and 47 per cent say the level of risk they are willing to take is increasing), it is more important than ever for investors to understand the range of investment options available to them to help meet their savings goals. In this year alone, investors expect to increase their exposure to emerging market stocks, private equity and infrastructure, real estate, hedge funds and alternative mutual funds; clearly attitudes are beginning to change.
“Many investors have set aggressive investment targets, but don't have a realistic way of reaching them,” says John Hailer, chief executive officer of Natixis Global Asset Management in the Americas and Asia. “Something has to change. The markets have reached new heights and investors feel generally comfortable about portfolio performance. But without a plan that incorporates individual risk and personal benchmarks, the odds are diminished that investors will meet their goals, and that is the greatest risk of all.”
Critical to the success of recent pension reforms, more and more investors are turning to professional advice to make their investment dreams a reality. The number of UK investors who report an ongoing relationship with a financial adviser jumped significantly this year from 28 per cent to 39 per cent.
Unfortunately, many investors are still lacking the guidance of ongoing financial advice. Despite 88 per cent of UK investors agreeing that it’s important to set clear investment goals for different time periods, over a quarter (28 per cent) have never enlisted a Financial Adviser to help them along the way (instead, many have preferred to rely on the advice of their spouse (35 per cent) or a family member (11 per cent)).
The good news is that these existing relationships are strengthening. The majority of investors believe their financial adviser understands their retirement savings (82 per cent) and income goals (79 per cent) well, and 64 per cent are more interested in discussing risk with their financial adviser, up from 53 per cent last year. Sixty-six percent have spoken with their adviser about setting specific personal goals for their investments.
Advisers can help investors define personal benchmarks and bridge the investment knowledge gap. For example, 75 per cent of investors would consider including alternative investments in their portfolios if their adviser recommended them, an important ingredient in more durable investment portfolios that manage volatility and help keep investors in the market and on track to meet their savings objectives.
Jackson says: “With the UK at a retirement crossroads, the government’s recently announced pension reforms could not be better timed. The greater flexibility provides an opportunity for asset managers to develop investment solutions which produce the stable income requirements investors will be looking for, whilst protecting capital which is now available to be handed down to future generations. Investors should work closely with a financial adviser to identify their savings and retirement goals and then build portfolios based on their own personal tailored benchmarks in order to meet them.”
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