Retirement income advice is a hot topic within the financial planning community at the moment, with the FCA due to release a report focusing on this complex area in the very near future.
At the beginning of the month we renamed our existing ‘Income MPS’ range to ‘Decumulation MPS’. We released a news post, which you can read here, explaining our reasons for doing so, why now and which clients we think the range is most suited to.
For this month’s blog, we thought it would be beneficial for our readers to take a closer look into the upcoming report. However, as our expertise lies within investment management, we have decided to draft in guest writer Christian Markwick from The Verve Group to share his thoughts.
Having been an adviser, training and competence manager, and CF10/CF11 in the industry for many years, Christian is very well-placed to understand what makes firms tick, what many are trying to achieve and how to assist them in getting there. He provides firms with pragmatic, no-nonsense support, helping them understand what their goals are and creating a path to help achieve them.
We believe this makes Christian perfectly placed to share his views and offer guidance on the subject of retirement income advice, what outcomes to potentially expect from the FCA’s report, and what steps you could take in the meantime to prepare your processes and philosophy in this space.
by Christian Markwick – Head of Adviser Support at The Verve Group
If you missed this, A) well done, but B), where did you manage to hide for that long and please can you share your rock with the rest of us?
For those who don’t know, the FCA issued their most recent Thematic Survey back in June, in readiness for their upcoming thematic review into retirement income advice.
The FCA made the call in 2021 to pause (postpone) their ‘assessing suitability pt2’ thematic review and have instead renamed it as a thematic review into retirement income advice.
Even though we had some warning at the end of 2022 that this was on the horizon, it still felt somewhat out of the blue when it dropped, mainly as it was about 4 weeks prior to the implementation date of Consumer Duty.
So, on a sunny Friday afternoon, along came a 40+ page and 87 or so question survey. There were many firms who missed it, some found it in their junk folders, others completed it without realising its significance (finger in the air job). Thankfully, the majority of the 1,300 firms selected gave the survey the attention it needed, and wow did it need some attention.
Around a third of The Verve Group’s compliance firms were selected to do the survey.
Hopefully the concept of a CRP (Central Retirement Proposition) is not a new one to anyone reading this, but the idea that this is simply the investment solutions you use to manage a client’s income in decumulation is now being proven to be incorrect.
For those unlucky enough to have heard me banging on about this for many years, will have already heard that I would like to re title a CRP as a ‘Central Retirement Philosophy’ or even ‘Central Retirement Process’.
Pension freedoms brought huge benefits to the financial advice/planning space, with the ability for more clients to enter fully flexible drawdown and with that the ability for financial advice firms to work with clients far longer than they may have done previously. That said, the Pension Freedom rules were very hastily drawn up and issued and as such, caught many (and I would suggest the FCA included) on the hop.
8 years on from the 2015 launch of pension freedoms, the FCA have decided that they need to understand how this market is functioning as this is a complex area of financial advice/planning and the regulator at present has very little info or data on how this is carried out.
The survey has shown us that the FCA also believe that your CRP is so much more than being about the investment solutions you utilise. The survey contained only 1 or 2 questions about the investment solutions. At this point, the FCA is ambivalent about whether you use active, passive, in-house models, outsourced MPS or ESG solutions. What they clearly care about is that the ‘right’ clients are in drawdown and how you as a firm are going to manage that drawdown.
Some areas that we would suggest you begin to focus on and have documented as process/philosophy are:
- Which clients would you recommend a fully flexible/hybrid/fully secure decumulation strategy to and how do you assess this?
- What is your firms house view on how to advise on and run retirement income for clients. Does your risk profiling change? How do you manage cash? How do you attempt to mitigate sequencing risk?
- Do you insist that a client has their minimum income requirement coming from secure means?
- Do you always create a financial plan (cashflow). If so, what assumptions are used and is this consistent across your firm and how often are these updated?
- Will you advise clients with a low ATR, C4L and Knowledge and Experience to take a fully secure or hybrid form of secure income/flexi access?
- As you can see, there is so much more here than the investment solutions you use, so these and more need to be documented and followed.
Then we turn our attention to the investment solution. Do you as a firm have any strong beliefs about how money in decumulation should be run? If you do and you can back these up, then great, get it all down on paper (so to speak) and get that DD in place.
If you don’t, or don’t feel adequately qualified to make such a call, then consider the elements that you’ve covered in the process document above and begin doing some research, or work with someone who can (uh, hum).
From a personal perspective (not advice), I’ve always had a strong belief that if you work with clients who have the capacity to take a level of risk that means their long-term income needs are not in jeopardy should there be market downturn or long-term levels of volatility, then absolutely run the money in the same way you would for a client accumulating.
If they don’t and you are literally managing their retirement income within a certain parameter of capacity for loss, then I’d suggest you work with an investment manager that works to a similar mandate.
We are now awaiting the FCA’s findings and the thematic paper on what they feel is and isn’t working, so do watch this space for any guidance on enhancements you may wish to make to your current philosophy/process. If you’re building your CRP for the first time, please make use of both the survey in terms of data you need to be recording and the elements you really do need to have documented and followed by all.
If anyone would like any further guidance on how to build a robust Central Retirement Philosophy or Retirement Income advice process, please do not hesitate to get in touch. I also held a TALK session with IBOSS recently as we ran through the areas, we believe firms need to consider when building their proposition. Catch up on that below.
This communication is designed for professional financial advisers only and is not approved for direct marketing with individual clients. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Investments are intended to be held over a medium to long term timescale, taking into account the minimum period of time designated by the risk rating of the particular fund or portfolio, although this does not provide any guarantee that your objectives will be met. Please note that the content is based on the author’s opinion and is not intended as investment advice. It remains the responsibility of the financial adviser to verify the accuracy of the information and assess whether the OEIC fund or discretionary fund management model portfolio is suitable and appropriate for their customer.
Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.
IBOSS Asset Management is authorised and regulated by the Financial Conduct Authority. Financial Services Register Number 697866.
IBOSS Asset Management Limited is owned by Kingswood Holdings Limited, an AIM Listed company incorporated in Guernsey (registered number: 42316).
Registered Office: 2 Sceptre House, Hornbeam Square North, Harrogate, HG2 8PB. Registered in England No: 6427223.