1. Growing Demand for Reliable Retirement Income
With an ageing population, advisers need fixed income solutions that provide consistent income and capital preservation amid market volatility.
2. Innovation Needed in Fixed Income Products
Advisers seek outcome-focused, actively managed funds and access to institutional strategies in retail formats to better meet client needs.
3. Education and Communication Gaps Persist
Advisers want clearer, scenario-based guidance to confidently assess fixed income options and navigate evolving market challenges.
The demands on the fixed income side of client portfolios are increasing. As populations age, they need consistent and reliable income to support their retirement. They also need protection against interest rate volatility, as well as a diversification and capital preservation buffer against stock market volatility. The BNY fixed income report suggests there is real demand among advisers for alternative solutions and a clear imperative to innovate.
Demographic pressures are the first challenge for providers of fixed income solutions: in the last 40 years, the number of people aged 50 and over has increased by over 6.8 million, while the number aged 65 and over has increased by over 3.5 million1. The research shows that the lion’s share (59%) of advisers’ clients is either in full or phased retirement.
This creates a growing need for fixed income solutions that can deliver reliable income streams without unacceptable volatility. It may even extend beyond simple income generation to predictable cashflow solutions that can support structured withdrawal strategies. The decumulation market remains in its infancy and ripe for innovation.
Fixed income is also being called on to do the heavy lifting on capital preservation: 42% of advisers in the research suggested this was a key innovation priority for their clients. 2022 spooked many advisers, with fixed income funds showing both unexpected volatility and, in some cases, significant capital losses.
Finally, there is the need for true diversification at a time when stock markets have seen three years of very strong returns and could be due for a pullback. Rising correlations between some parts of the fixed income market and equity investments have surprised investors. Some fixed income solutions have provided a properly diversified option, but advisers still struggle to differentiate between the funds that do and those that don’t.
Successfully addressing these demands will require collaboration across fund providers, platform operators, and advisers. The industry must step up to deliver genuinely innovative approaches that can meet advisers' evolving client needs and enable them to solve complex retirement income challenges.
Options
Solutions have emerged in recent years. Passive fixed income ETFs, for example, have become part of the landscape for advisers. However, advisers recognise their limitations. As one fund research house bluntly stated: "I am not a fan of using passive in fixed income as I think you are buying the most indebted companies and countries."
It is clear that advisers would like the fund providers to take their lead from the institutional market and deliver them in a retail-friendly format. As one adviser explained: "The amount of governance that goes into running pension money would be comforting if that was available in the retail space."
In particular, advisers like the idea of outcome-orientated products rather than the traditional return-focused approach. 37% said this should be a priority area for investment groups. Another discretionary fund manager noted the potential for liability matching approaches: "Liability matching is really interesting in the decumulation space. Decumulation is a big focus of the regulator and if there is a way to do that with greater surety at lower cost for clients, it is a positive outcome from a consumer duty perspective."
While advisers also want access to fixed income markets typically restricted to institutions (36%), this has its limits. Advisers remain unsure that areas such as private credit can ever be a retail solution. As one adviser commented: "Institutions are using a lot of private credit and it is being pushed our way. We run daily dealing vehicles so private credit has no place in our world unless we own that in a vehicle like an investment trust." It is not yet clear whether long-term asset funds (LTAFs) may provide a solution to this.
As it stands, traditional fund structures maintain their dominance in adviser recommendations, with mutual funds/OEICs accounting for 79% of fixed income vehicles. However, there are signs of evolution, with 17% of advisers citing active ETFs as an innovation priority. These get round many of the problems of passive ETFs and could work well with advisers’ preference for active management - the primary barrier to current ETF adoption. It also helps with implementation challenges.
As one fund research house noted: "Active ETFs in fixed income could be a game-changer for many advisers. They give you the trading flexibility and platform compatibility of ETFs with the risk management benefits that are essential in today's volatile bond markets." Nevertheless, there are still regulatory considerations and worries over platform access. These remain important areas to resolve if ETFs are to gain traction.
Education gap
There is an education gap for advisers on fixed income. They rate their confidence on evaluating fixed income managers at just 6.6/10. This leaves significant scope for advisers to build stronger assessment frameworks, and for providers to communicate their strategies better. Advisers want practical, scenario-based guidance: "Getting explanations of what fixed income would be better in certain environments e.g. In this type of market, these are the funds you should be looking at," one adviser said.
The fixed income fund sector is ripe for disruption, but any new fixed income options will not only have to present coherent solutions to the challenges faced by advisers, but also be clear about how they are doing so. There is a communication challenge alongside the product development challenge that fund providers, platforms and advisers must work hard to address.
1https://ageing-better.org.uk/ageing-population
The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.
