Less than a quarter (23%) of firms have a different process for assessing attitude to risk in decumulation, as opposed to accumulation and just three in ten (31%) have a distinct process for assessing capacity for loss, adding to the risk of their running out of money in retirement warns EV. The financial services technology expert urges advice firms to urgently review retirees’ income plans and ensure they align with their risk profiles to avoid foreseeable harm.
The striking findings formed part of the FCA’s retirement income advice thematic review, published last week. In the review, the regulator identified risk profiling as a key area for improvement, stating: “The findings in this area are concerning. 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, as a result, incur financial loss” [Review, 2.25, p21].
Furthermore, the FCA’s Dear CEO letter states, “Risk profiling was not evidenced, was inconsistent with objectives and customer knowledge and experience, or lacked consideration of capacity for loss”.
Chet Velani, EV’s Managing Director, comments: “These findings are truly shocking. 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, potentially leading to severe financial distress in their retirement years.
“Our psychometric income risk questionnaire, developed in 2017, shows that retirees seeking a sustainable income during retirement are more risk-averse than consumers accumulating wealth or funding their retirement. This is understandable when a key concern for retirees is running out of money and suffering hardship 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.
The FCA also commented. “it was apparent that not all firms were taking account of the differing needs of their customers in decumulation, as opposed to accumulation” [Review, 1.23, p9].
“EV wholeheartedly agrees that taking account of consumers’ objectives is fundamental to defining risk and consumers’ risk profiles. It is important to understand how worried consumers feel about not meeting their investment goals and measuring the degree of this concern. Properly assessing a client’s capacity for loss is also essential to ensuring suitability. 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.
“In light of this thematic report, advice firms must urgently review retirees’ attitudes to income risk, using a suitable risk profiling solution that takes account of the specific risks faced in retirement. Failure to ensure that clients’ income plans align with their risk profiles could result in foreseeable harm and failure to meet one of the cross-cutting obligations of the FCA’s Consumer Duty.”
