De-risking retirement income planning advice


    Talking with advisers about the new pension freedoms there are two common themes of conversation:

    1. Excitement about the opportunities that the biggest shake-up of the pensions industry in a lifetime is creating for them; and

    2. Concern about the potential criticism and liabilities facing them and our industry as whole.

    This latter is because there are now an almost infinite number of retirement options, clients’ needs are always evolving, longevity is unpredictable and estate planning features at a product level based on age. Future political and regulatory tinkering also features.

    I can certainly appreciate the predicament here, especially with no liability long stop to advice.

    As we assist many advisers with their due diligence I thought it useful to comment from a research perspective on possible ways to try and mitigate the risks involved when providing retirement income planning advice.

    Service offering

    It is common for advisers to run their business based on clients requiring a minimum invested balance and charging fees based on a percentage. However, this approach may not always be the most appropriate.

    Retirement planning for the majority involves a decumulation strategy, which in essence is to reduce the value of savings over time. A few questions to consider, keeping Treating Customers Fairly rules in mind:

    • How will you document and manage the conflict of interest in that best advice is likely to result in a reduction in the value of funds under influence, and therefore your income, while at the same time needing to maintain or increase the value of funds under influence to maintain and grow your income and profitable?

    • What happens to those clients and the fees they pay you when they drop below your threshold (not withstanding other assets that may be managed)?

    Fact finding and needs analysis

    The information ascertained about a client’s knowledge and experience, combined with their needs, objectives and attitudes, forms the foundation of the research required and therefore the advice provided.

    Many advisers carry out an attitude to risk calculation and base their advice on this. However, the FCA has indicated a number of times that they are looking for a more detailed analysis and indicate that advisers should consider recording clients’:

    • Attitude to risk

    • Capacity for loss

    • Required return

    Even with entirely jointly-owned wealth, couples may have different answers to these three points.

    The clients’ underlying required return may override the other two. For example, just because a client has a high attitude to risk and a huge capacity for loss, it does not mean that a high risk investment strategy is always recommended, especially if the required return can be met with a simpler, cheaper, low risk strategy.

    Furthermore, many advisers and providers recognise that in the decumulation stage it is about generating income and cash at the right time, from the right sources to meet a client’s needs.


    Questions appear on the last page of this article.