IFAs are the best placed people to talk about investment risk, market opportunities and retirement goals, but in our opinion are sorely lacking when fully assessing their client’s true appetite for risk.
So, let us start from the beginning.
You are sitting down with a client, you have built rapport, gained the client's trust, now you set about on the fundamental task, assessing the client’s capacity and tolerance for loss, possibly using psychometric testing and projecting forward with volatility or stochastic based models, placing your client in a neat category to which their investment path is forged.
But while assessing your client’s goals, both pre- and post-retirement, have you truly looked at their risk appetite in all its forms?
When considering the needs of clients, is this just about what type of investments to choose?
Risk is multi-dimensional and should not be viewed as a single issue when assessing a client’s investment future.
Risk models account for client’s appetite for investment risk but do not account for life events, like critical illness, accidents or not being able to work for months.
As an IFA, you would not dream of putting a cautious investor’s entire life savings in a single Nigerian mid-cap, but by not having the conversation, you are leaving your clients open to substantial risk.
When discussing protection sales recently with IFAs, we have found that protection sales make up less than 5 per cent of their overall portfolio.
So why are not IFAs advising on and selling protection?
The first reason for this is about framing the protection conversation and making it an inherent part of assessing client’s appetite for risk. Mortgage brokers are now having more conversations than ever about protection and are introducing insurance at the start of their mortgage research.
The successful brokers can help to achieve their client’s goal of buying a house, but more importantly focus on ensuring that the client and their family can retain it over the term of their mortgage.
Using statistics to make clients aware of the likelihood of a serious life event happening to them and the impact on their ability to pay off their liabilities, mortgage brokers are now selling more protection than ever – and not just term assurance.
iPipeline’s Risk & Mortgage Protection Report clearly states than for every 10 people like me, five will not be able to work for two months or more over the term of the mortgage.
Now, being an irresponsible millennial that I am, spending all my money on champagne and vegan brunches, this would have an enormous impact on my ability to pay my mortgage.
It is easy to see why mortgage brokers have now over taken IFAs in the percentage of Income Protection cases sold. Income Protection is our fastest growing product line and is predominantly written by mortgage brokers as part of a multi-benefit sale.
The second reason for a lack of protection sales is rather controversial (I am not talking to you dear reader, so put down the pitch fork).
Some IFAs are not having the protection conversation as they are earning considerable fees annually from investments, and therefore selling protection is an unnecessary distraction from farming their large field of cash cows.
Protection is seen as financial services simple cousin and is often overlooked, however, what is the first thing a client will do when they are unable to work? They stop investing and look to draw from them (and no I do not believe your client is ‘self-funding’).
When assessing client’s goals and aspirations, we must talk about wealth, illness, care and death.
It feels very ‘un-English’ to openly discuss these taboo subjects and it can be very awkward.
Octopus Investments recently published some alarming statistics in relation to the huge intergenerational wealth transfer that will be taking place over the next eight years.
When trying to identify where this wealth would be transferred to, of the advisers surveyed, 22 per cent did not know who the beneficiaries are and 39 per cent said they had not discussed it with their clients.
This looming integenerational wealth transfer is a symptom of a wider issue, it is about having the difficult, uncomfortable and often awkward conversation about death and illness.
It is about ensuring you have properly assessed your client’s holistic appetite for risk, beyond their investment capacity for loss.
While the wealth market is turning into a Brexit-fuelled bear, the protection market is distinctly bullish and there has never been a better time for wealth IFAs to follow the trend we have seen in the mortgage space and begin to invest in protecting their client’s futures.
Stephanie Hydon is national account manager at iPipeline
