With the retirement market expanding rapidly, and an increased focus from the regulator as a result, Andrew Tully, Technical Director at Canada Life, discusses why it's time to think seriously about implementing a Centralised Retirement Proposition (CRP) to evidence your retirement advice approach.
"By modelling the amount of income a client can reasonably expect to take over a period of 25 to 30 years, you can manage their expectations and flag any gaps or surpluses that exist."
In its 2018 Product Intervention and Product Governance Sourcebook (PROD), and its 'Dear CEO' letter in early 2020, the FCA made it clear that advisers are expected to demonstrate why a particular retirement solution was chosen for a client. And if you can't evidence your thinking, it will be a rule breach. While the regulator stopped short of providing a compulsory framework to adhere to, it's becoming increasingly clear they want to see a well-documented, robust, repeatable process for retirement advice, which is where the CRP comes in.
What are the benefits of a CRP?
Apart from meeting a clear regulatory need, a CRP can also help de-risk your business and enable better client outcomes. It can help you efficiently:
Manage expectations on how much income your client can expect
By modelling the amount of income a client can reasonably expect to take over a period of 25 to 30 years, you can manage their expectations and flag any gaps or surpluses that exist. While it's impossible to predict the future, you can also factor in likely future events, such as paying for a wedding or university fees, and allow for any unexpected expenses.
Demonstrate a client's capacity for loss
Understanding a client's attitude to risk is not as simple as it was in the accumulation phase. A client might consider themselves to be very risk averse, but in the decumulation phase this could leave them under-invested and in danger of not being able to sustain their income levels over time or suffering large irrevocable losses through investment underperformance. Equally, if they take too much risk, they are open to volatility and sequencing issues. By modelling different scenarios whereby clients lose a percentage of their fund through poor investment performance, you can help them better understand the amount of risk they NEED to take, rather than the amount of risk they WANT to take. It's this understanding of your client's capacity for loss that should underpin the investment strategy.
Assess if your client is, or could become, vulnerable
As their adviser, you are very well placed to understand how vulnerable your client is or could be in the future. This is of particular importance to the FCA and is one of the reasons they so vehemently advocate the need for regular reviews, and documentation of conversations and recommendations. Vulnerability comes in many different forms, and spares no one. It could relate to your client's health, certain life events (such as divorce), how resilient their finances are to unexpected losses, or even their level of financial knowledge. By assessing your clients against each of the FCA's drivers of vulnerability – both at outset and at their regular reviews – you can ensure your advice is tailored accordingly.
Ensure your recommendations are cost appropriate
All costs should be clearly documented and included within any income modelling. You must ensure your client fully understands the costs involved and the impact they will have on their future income.
Offer regular income reviews
Every individual in retirement has evolving needs. These needs can change gradually over time, or they could change in an instant. Providing regular reviews is beneficial for them, and you.
Building a CRP
There is no regulatory requirement to have a CRP, and there is no right or wrong way of going about it. You can start by segmenting your clients and detailing your views on the appropriate strategies to help each of these segments. To do this, we advocate taking a 5-step approach:
1. Business advice and risk management:
Document your firm's strategic views on key matters such as which platform or products you use for each client segment, your views on sustainable withdrawal strategies and investment proposition, and links to any company policies, such as for vulnerable clients.
2. Your review process:
Detail your firm's review process and the client focussed review process. What are you doing on a regular basis to ensure your processes are up to date, and what do you offer your clients at their regular review (and how often are these carried out)?
3. The tools and calculators you use:
What tools and calculators do you use, when are they used and by whom (e.g. paraplanners or advisers)? This section should also detail how often any assumptions are reviewed and by whom.
4. Your investment philosophy
Detail your investment strategy for different client segments. It is likely to differ based on whether clients are taking a regular income, what other assets they have, the balance between income and legacy planning and so on. If you have an investment committee or use your own model portfolios, details would be included here.
5. Advice support
Detail the documents you use within your retirement process, such as the fact find, how you measure attitude to risk and capacity for loss, a safe withdrawal strategy and client engagement letter. You should also detail any assumptions you follow, how often these are reviewed and by whom. If third parties are involved, then appropriate reference should be made.
Working together in partnership
We can help you construct your CRP, as well as provide as much product and marketing support as you need – not just around our products, but for the range of products on the market. It's in all our interests to ensure that advisers are well equipped to help their clients achieve a sustainable retirement income, with as little risk as possible for all concerned, and we're here to support you.
Lines open weekdays 9am-5pm. Calls may be monitored for training and quality purposes. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales no. 973271. Registered office: Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. MGM Advantage Life Limited, trading as Canada Life, is a subsidiary of The Canada Life Group (UK) Limited, and is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales no. 8395855. Registered office: 6th Floor, 110 Cannon Street, London EC4N 6EU.