Less than a quarter (23%) of advice firms have a different process in place for profiling risk in the decumulation and accumulation phases, leaving clients at risk of running out of money, warns EV.
According to the financial services technology provider, just three in ten (31%) have a distinct process for assessing capacity for loss.
The findings formed part of the FCA’s retirement income advice thematic review published last week. In the review, the regulator said its findings across risk profiling were “concerning” and cautioned that if firms do not carry out adequate risk profiling, customers may be invested in solutions not aligned to their profile or tolerance level and could incur a financial loss.
Chet Velani, managing director at EV, said: “It is alarming that less than a third of advisory firms have a distinct process for evaluating a client’s capacity for loss that is separate from their attitude to risk assessment. This means it’s very likely that many retirees have been recommended retirement income solutions that are too risky and could potentially lead to significant consumer detriment.
“Using appropriate methodology to assess the client’s risk profile and check investment suitability is a basic part of accumulation advice and should be standard practice for decumulation. By not taking a suitable risk profiling approach, a significant number of retirees may be exposed to financial risks that they are not prepared or equipped to handle.”
Velani said EV’s own psychometric income risk questionnaire found that retirees seeking a sustainable income during retirement are more risk-averse than consumers accumulating wealth or funding their retirement.
Velani added: “This is understandable when a key concern for retirees is running out of money in later life. While those still investing to grow their wealth might find an investment setback distressing, they will have options to get their plans back on track. For many retirees, however, it could be life-changing if investments do not perform as expected as they would find it very hard to recover financially.”
Main image: alexander-mils-R0t2pAukP9E-unsplas
