Andrew Tully, Technical Director at Canada Life, discusses why a tailored approach to retirement income advice is essential, and offers suggestions on how to de-risk your processes while satisfying the FCA’s guidelines.
Not so long ago the biggest risk facing clients was losing their hard-earned savings in the run up to retirement because of some careless, or unlucky, investment decisions. But now there’s a new threat at large. Thanks to increased longevity and the demise of pension guarantees such as final salary pensions and annuities, people are at increased risk of running out of money in retirement.
And with the rise in popularity of flexi-access drawdown, the problem is becoming more acute. Defaqto’s 2019 Pensions Service Review found that 85% of the value of advisers’ retirement business was invested in flexi-access drawdown, while only 9% of the value was invested in lifetime annuities. And that doesn’t include the number of non-advised flexi-access drawdowns at play.
The FCA’s expectations of retirement advice
This is quite a departure from where we were less than five years ago, and it has given rise to a plethora of challenges for advisers and their retirement advice process. In its Product Intervention and Product Governance Sourcebook (PROD) issued in January 2018, the FCA clearly laid down its expectations.
Among other things, advisers must ensure the cost to the client is appropriate and detail those costs on an annual basis, demonstrate they fully understand the products they’re recommending and evidence that those products are in the best interests of their client. In other words, you must be abreast of the full range of product options, and provide a detailed, tailored recommendation report for every client with regular reviews thereafter.
Why developing a CRP could be the answer
That may be easier said than done when trying to run an efficient business, and you would be forgiven for thinking that giving retirement advice is more risk than it’s worth. But there is help at hand. We’re increasingly hearing calls for advisers to develop a Centralised Retirement Proposition (CRP) to sit alongside their Centralised Investment Proposition (CIP). The Ying of decumulation to the Yang of accumulation.
But what would it entail, and is it strictly necessary? In short, a CRP can offer a framework that helps you manage the various interrelated risks of giving retirement advice, while helping you address the issues your clients face as they enter retirement. These include:
1. Managing expectations on how much income your client can expect
By modelling the amount of income a client can reasonably expect to take to around age 100, you can manage their expectations and flag any gaps or surpluses that exist. While it’s impossible to predict the future, you can also factor in likely future events, such as paying for a wedding or university fees, and allow for any unexpected expenses.
2. Help them understand their capacity for loss
Understanding a client’s attitude to risk is not as simple as it was in the accumulation phase. A client might consider themselves to be very risk averse, but in the decumulation phase this could leave them under-invested and in danger of not being able to sustain their income levels over time or suffering large irrevocable losses through investment under performance. Equally, if they take too much risk, they are open to volatility and sequencing issues.
By modelling different scenarios whereby clients lose a percentage of their fund through poor investment performance, you can help them better understand the amount of risk they NEED to take, rather than the amount of risk they WANT to take. It’s this understanding of your client’s capacity for loss that should underpin the investment strategy.
3. Assess if they are, or could become, a vulnerable client
As their adviser, you are very well placed to understand how vulnerable your client is or could be in the future. This is of particular importance to the FCA and is one of the reasons they so vehemently advocate the need for regular reviews, and documentation of conversations and recommendations.
Vulnerability comes in many different forms, and spares no one. It could relate to your client’s health, certain life events (such as divorce), how resilient their finances are to unexpected losses, or even their level of financial knowledge. By assessing your clients against each of the FCA’s drivers of vulnerability – both at outset and at their regular reviews - you can ensure your advice is tailored accordingly.
4. Ensure your recommendations are cost appropriate
All costs should be clearly documented and included within any income modelling. You must ensure your client fully understands the costs involved and the impact they will have on their future income.
5. Offer regular income reviews
Every individual in retirement has evolving needs. These needs can change gradually over time, or they could change in an instant. Offering regular reviews could be beneficial for them, and you.
Never has it been so important for advisers and product manufacturers to work together in partnership. We can help you construct your CRP, as well as provide as much product and marketing support as you need – not just around our products, but for the range of products on the market. It’s in all our interests that advisers are well-equipped to help their clients achieve a sustainable retirement income, with as little risk as possible for all concerned