Reliance upon a ‘capital growth mindset’ among advisers in the decumulation phase is failing to address retirees’ key ‘risks to income’, a new report from NextWealth has revealed.
The findings of the report ‘Guarding Financial Futures’ showed that while the risk-profiling and risk-management processes used for clients in the accumulation phase are generally robust, many firms are leaning on the same processes when advising clients in the decumulation phase, when they face different and more complex risks.
Kavi Myladoor, retirement income director, retail, at Just Group, said advice ecosystems developed to manage risks to capital “are not suitable at the point the primary risk becomes the sustainability of income.”
NextWealth’s report found that most advisers use the same profiling tool and set of questions for clients in accumulation and decumulation and that 56% take a manual approach to managing risk around income generation, compared to around a third who use a tool.
Myladoor said: “This research by NextWealth suggests many retiring clients are shoehorned into the processes designed for savers rather than spenders. The use of tools and processes specifically designed to manage retirement risks, sequencing risk, longevity, income risk, is far less common than could be expected.
“Where risk profiling is not picking up key differentiation between capital and income risk and advisers need to fill in the gaps manually, there is far more chance of misunderstandings, preconceptions and bias creeping in.”
Myladoor said there is a high likelihood that two clients with similar resources and objectives could receive wildly different retirement recommendations, not only from different firms but from different advisers within the same firm.
Myladoor said that nearly a decade on from pension freedoms, one of the focuses of the FCA’s forthcoming thematic review on retirement advice will be whether firms are delivering consistently suitable advice.
She added: “We should be prepared for the regulator to put more pressure on firms to ensure their approach to savers and spenders is appropriate. The industry needs to get behind minimum acceptable standards for retirement advice in key areas.
“There are some basic things which perhaps should be mandated, such as the use of retirement specific fact-finds and risk-profiling, stochastic rather than deterministic modelling to better reflect real world probabilities and more personalisation taking into consideration lifestyle factors and medical conditions.”
