'Advisers need to tread carefully in the changing landscape of retirement income advice'

The Financial Conduct Authority recently published the findings of its thematic review of retirement income advice, as well as sending a 'Dear CEO' letter highlighting the actions that firms should take following the review.

The concern is that the way in which consumers access their retirement savings is changing, and people (on average) will now live much longer after retirement – the government's last statistics suggest that people will live on average for 22.8 years after giving up work.

The FCA's findings were mixed, with some firms having adapted their approach following the introduction of pension freedoms, while it seemed some firms weren’t really considering the needs of consumers.

The FCA confirmed firms should make use of the retirement income advice assessment tool (RIAAT), which has been established to consider the suitability of advice files. 

The FCA's expectations of advisers were expanded on in the 'Dear CEO' letter, which stated that firms should be:

• Comparing their own work against the examples of good and bad practice included in the thematic review.
• Making use of the RIAAT to establish whether the FCA would consider the advice suitable.
• Reviewing the FCA article on cash flow modelling to ensure the modelling is suitable.

The FCA has confirmed it will be reviewing the market more generally going forward and will be carrying out further supervisory work.

So, what does this mean for advisers?

The adviser's role

Arguably the importance of an adviser has never been greater.

Consumers face complex financial decisions and while many will want to focus on their current financial situation, advisers will need to steer them to consider what their needs will be in 10 or 15 years (or even longer).

This is an area where advisers can really shine (as well as earn their fee), but it's not without risks.

Each retirement journey and the needs of those individuals will be different.

Thorough fact-finds will need to be conducted to understand the consumer's financial stability, their goals, health considerations and their attitude towards risk. There's no one size fits all approach.

What is suitable for someone now, may be completely different a decade or two down the line.

Equally, advisers will need to deal with clients that may have objectives that aren’t suitable for their long-term needs.

Advisers will need to tread carefully here and document that they have explained the risks if a customer chooses to pursue an objective aligned more to 'wants' than 'needs'. 

Given the popularity of drawdown, accurate and realistic cash flow modelling may be key to defending complaints.

If the adviser can show that a realistic and agreed upon retirement plan was sustainable to a point beyond the estimated age of mortality, based on a sensible rate of return, then this will form a good starting point for a defence.

Whether the cash flow modelling is appropriate will of course depend on the thoroughness and accuracy of the fact-finding and 'know your client' process. 

Following on from the above, advisers should also be considering all potential options (including annuities) and recommending the most appropriate, even if this is something that the customer themself did not want to consider.

The real risk here comes from customers perhaps making decisions that are not sustainable, regardless of how they have been advised, and fully setting out what was discussed and decided upon may be key if such decisions lead to financial difficulties.  

Going forward the FCA is less likely to be as forgiving.

Additionally, what is suitable for someone now, may be completely different a decade or two down the line.

A retirement income strategy in 2024 may look wildly different and be potentially unsuitable in 2044. Does that mean it wasn’t suitable at the time? Not necessarily.

However, advisers may be criticised if they haven't considered appropriate diversification and haven't allowed for changes in circumstances.

This also highlights the need to assess whether a customer's arrangements are suitable on an ongoing basis (something the FCA will expect under the consumer duty).

Advisers will also want to ensure that they are able to evidence the advice provided – providing the most suitable advice may not be sufficient to defend a claim if the adviser can't evidence what was actually said. 

Of course, the FCA will expect advisers to also comply with their regulatory obligations, including the FCA's consumer duty.

Indeed, it noted in the 'Dear CEO Letter' that while it didn’t consider files against the requirements of the consumer duty, it anticipates that most firms would fail to currently comply with the requirements without taking further steps.

Going forward the FCA is less likely to be as forgiving. 

Nobody is saying this is an easy process and advisers need to tread carefully if they are to navigate the changing landscape of retirement income advice.

However, it's not all doom and gloom; the FCA appears keen to provide assistance to the sector to ensure improvements are made. Advisers can't bury their heads in the sand and should address any failings they may have sooner rather than later. 

David Allinson is partner and Ash Daniells is senior associate at RPC