Following today’s FCA Thematic Review of Retirement Income Advice, Chet Velani, Managing Director, at leading financial software provider, EV.
“The FCA’s report is a wake-up call to advisers. It is evident that many firms are failing to take account of the different needs of customers in decumulation versus accumulation and are inadvertently exposing retirees to too much risk. Given that unsuitable retirement income advice has the potential to result in significant harm to consumers, it is crucial that adviser firms effectively understand the retirement needs of their customers and use processes and solutions suitable for the different needs of retirees looking to provide themselves with an income.
“As part of the review, the regulator issued a “Dear CEO” letter requiring all adviser firms to “take steps to address the review’s findings”. This letter highlighted urgent work is needed around risk profiling and the approach to determining income withdrawals. Without taking appropriate action, many firms risk not meeting the requirements of the Consumer Duty. The report supports our long-held view that a comprehensive risk suitability process specifically for decumulation is required, using a different methodology for accumulation.
“Those drawing on their pension wealth to provide an income have very different needs and face different risks than those in the wealth accumulation phase. While no one wants poor investment performance, those building their wealth have time for investments to recover, could save more or work longer. However, for those already in retirement and living on the income from their investments, an extended period of poor returns, particularly early on, can be catastrophic. If income begins to run out in later retirement, there may be little that can be done about it beyond living in very reduced circumstances.
“The FCA’s report reinforces the existing Consumer Duty emphasis on the ongoing monitoring of client investments to ensure suitability and avoid foreseeable harms. This is of paramount importance for clients using drawdown. There needs to be regular reviews, the investment strategy must be fully aligned with the individual’s long-term income needs, and the specific decumulation risks, like longevity, inflation, and sequencing risk, must be front of mind.
“To help advisers assess the sustainability of drawdown for their retiree clients, we have created a measure of income risk: Income at Risk (IaR). Put simply, this measures the downside risk to clients’ sustainable income and can be used to select funds that match their clients’ attitude to income risk in a way familiar to advisers advising on accumulation.
Many of the FCA’s findings tally with EV’s white paper, published In early 2021, Drawdown: The Mirror Image of Accumulation. This shows that most current drawdown solutions are exposing retirees to too much risk, and urgent action is needed to protect them from running out of money too soon.
To find out more, download EV’s 2021 white paper from its website:
https://info.ev.uk/drawdown-whitepaper.
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Press contacts
Jenette Greenwood, PR Director, the lang cat
07710 392303 / jenette@langcatfinancial.com
Jenny Burt, Director of Marketing, EV
07557 681 080 / jennifer.burt@ev.uk
About EV
EV is one of the UK’s market-leading digital financial planning solutions providers. We have operated as an independent organisation for over a decade, backed by a further 18 years of financial services consultative experience. We connect and empower our intermediary financial partners with intuitive, customer-centric advice, guidance software, and investment solutions.
We have a history of developing engaging tools that help financial advisers and their clients navigate the complexities of financial markets, ultimately delivering simplified financial planning and enabling clarity over investment options, cash flow forecasting and aligned client risk profiles.
Powered by our proprietary market-leading stochastic asset model, our powerful calculations and strategic multi-asset allocations are used globally across the financial ecosystem by financial advisers, pension and platform providers, asset managers, banks, and building societies, to name but a few.
