FCA hunting for quality advice

First, establish your client’s income needs in retirement. 

Ask yourself whether your client files show that you have had a granular discussion with the client about their current spending habits and how these may change in retirement.

Is there a detailed and credible breakdown of current expenditure?

What is the client planning to do with their extra leisure time, and what are the expenditure implications?

Is it clear whether the client’s partner’s income and expenditure has been considered?

Second, assess the sustainability of their retirement income.

Is it evident from the file what sources of household income are due to start or stop, when this will happen, and how this has been taken into account?

Is it clear what assumptions have been used for the cash flow analysis?

Are the assumptions reasonable, and how have they been stress tested (for example, market crashes, higher expenditure, living well beyond average life expectancy)?

Do your client files show that you encourage clients to consider, and plan for, the likelihood of care costs, or do your advisers simply assume that spending will wither away as the client enters the later years of retirement?

Last of all, discuss costs and charges and value for money. 

The FCA is bound to look at costs and charges, so ask yourself the following questions:

• Does your tariff cater for retirement income advice, and is it compliant? What other information does the client receive to help them understand likely costs before chargeable work commences (for example, engagement letter or statement of work)?

  • For new clients, does your suitability report contain a Mifid II-compliant ex-ante disclosure of aggregated costs and charges?
  • For ongoing advice clients, are you providing a compliant ex-post disclosure of costs and charges?
  • How big are your aggregated costs figures? Will they look like good value for money?
  • Do your suitability reports show that advisers are taking the impact of total advice and investment costs on the client’s retirement income into account, by selecting lower-cost solutions where suitable?
  • Is it evident that you are providing a comprehensive annual review service that is commensurate with your ongoing advice fees?

Conflicts of interest and consideration of alternatives

The recent FCA letter warns advisers that it will be looking at the way they identify and manage conflicts of interest.

Challenge yourself about the potential conflicts of interest you are faced with when providing retirement income advice.

For example, if you recommend flexi-access drawdown, this is likely to generate ongoing advice fees for your company and (if you use an in-house investment solution) ongoing investment management or product fees.

The FCA will be looking out for indications that advisers routinely discount alternative solutions that tend to generate little or no ongoing revenue in a tick-box manner, rather than seriously considering them and challenging clients’ preconceptions. For example:

  • Annuities – particularly as clients get older and mortality drag kicks in, securing a stable income makes more sense and annuity rates become comparatively more attractive.
  • Equity release – not enough advisers give this serious consideration as an option. Average fixed rates for life are now less than 4 per cent.
  • Workplace pensions – these can offer a simple, low-cost solution for some clients. Contrary to the outdated claims I see too often in many suitability reports, many schemes currently offer a wide fund choice and flexible retirement options.
  • Use of annuities within a drawdown contract – these can help to provide a balance between income security and flexibility/tax efficiency.

Risk profiling and investment solutions for decumulation

Ask yourself about whether your standard risk-profiling methodology works well for clients in decumulation, given the different risks they face.

Do your client files demonstrate how you are educating clients about sequencing risk and longevity risk, and how you take them into account in the investment solutions you recommend?