Over the last few years, firms have been asking themselves how they will make money in the post RDR world. Some have been more honest and transparent about this question than others. A number of commentators along the way have predicted a large decrease in the number of financial advisers. The simple and overwhelming reason for this? Not enough customers will be prepared to pay for advice to keep the current number of advisers in business.
The Treasury provided an unexpected opportunity for financial advisers earlier this year when they announced that, from April 2015, investors may be able to unlock their pension funds and exercise greater control over investing their hard earned wealth. Suddenly demand for advice may prove bigger than anticipated.
The opportunity, however, is not without risk. There was an article in this weekend's FT about today's silver generation being prepared to take on much greater investment risk. Reportedly, 27% of over 60's who responded to an online survey said that they were willing to put more than half of their portfolio into equities. Many of those who responded expected to pursue a second career after retiring. This presents a very different picture to the conventional norm – according to data from the 2011 Census, 90% of over 65's were economically inactive. This same silver generation will also find itself a marketing target in a way never seen before, as businesses increasingly think of ways to capture more of the "grey pound". With it, the silver generation will be tempted to spend more money than those before them. With Mr Osborne's backing ("people should be free to choose what they do with their money") the silver generation look set to redefine conventional retirement and the financial objectives for growing old.
There are of course many in the silver generation who have good savings for their means, but who will not be able or lucky enough to pursue a second career on retirement. For these people, their accumulated pension pot will be under strain from extended life expectancies, financial demands of the younger generations, the possibility of having to pay for care in later years and amongst it all, hopefully enjoying retirement. This will bring increasing pressure to make the money go further. Either people will have to reduce their expectations on retirement to balance the books or they will need to chase higher returns to meet their retirement objectives.
What the above means is that, for two very different reasons, those accessing their pension funds from April next year might be wanting to take greater risk with their funds than might have conventionally been expected in the past. There will of course be some people who decide to take the investment risk and lose. These same people are unlikely to have capacity for loss (their earning power being less than in years gone by) and in at least some of these instances firms can expect complaints to follow. The question is, what can firms do to protect themselves?
The answers are, I'm afraid, rather unexciting. Documentation is the key. If the client's investment objectives do not match with his/her attitude to risk/capacity for loss then the adviser needs to explain this to the client. In the real world, this is likely to form part of a discussion. In the regulated world advisers operate in, this discussion should be followed up in writing, clearly setting out the mismatch and what it means for the client (either their investment objectives have to change or they have to be prepared to take greater risk). What's most important is that firms do not take these decisions on behalf of their client (as we have seen in the past). It may also be prudent to strengthen the internal pre-approval process for advice involving a mismatch between the client's investment objectives and attitude to risk/capacity for loss. Whilst I appreciate the additional resources this requires, the FCA is likely to continue to regard the silver generation as a vulnerable group for which pre-approval demonstrates systems and controls that put the client first. For networks, principal firms will also need to clearly communicate (and I suggest document) their approach to this issue.
How will these measures will be received by the FCA and FOS? We know the FCA does not share the Government's confidence that retail customers are financially savvy enough to decide how to best spend their money. I recently spoke at the FE Investment Summit. Immediately after, Rory Percival (Technical Specialist at the FCA) took to the stage and was asked a question from the audience almost exactly on point. Mr Percival's response was balanced, recognising the practical difficulties for advisers. His response, like my comments above, was that firms need to protect themselves by documenting the discussion. Where the client was insistent that they wanted to take additional risk to meet their investment objectives, then this should be recorded (preferably with a counter signature from the client). Importantly, for the first time to my knowledge, it was recognised that there may sometimes be an informed 'need for risk'.
How FOS will approach such complaints is less clear. There remains an inherent risk of adverse findings even where the firm has done all it can to demonstrate an informed need for risk. In the past, FOS has on occasion taken an almost strict liability view; that where the investment is too high risk and/or the investor does not have the required capacity for loss then the advice is unsuitable regardless of what the client was told and/or wanted to achieve. The conventional wisdom- the older the investor, the lower the risk (all other things being equal)- may no longer apply. Whether FOS is prepared to accept this will be significant. That, along with good documentation and a clear internal process to deal with this inevitable scenario is likely to leave firms in the best position to resist complaints in the future and demonstrate good customer outcomes. As avid readers of our blog, it would be useful if FOS could provide some advance guidance on their approach to this issue before April 2015.