Embracing choice

Kim Lerche-Thomsen discusses how processes need to change if advisers are to help clients make the most of their retirement options

Problem-solving is fundamental to running a business. What we sell needs to help our customers overcome issues, not to mention the personal satisfaction of solving problems – that is hugely motivating.

The problem that still needs to be overcome is how to ensure increasing numbers of retirees make active choices from these options when, historically, the vast majority have moved straight into lifetime annuities without even exercising their right to shop around for the most generous rate.

Clearly those with very small pension pots are not going to have access to the same range of choices as those with bigger provision. However, this market is forecast to grow by two-thirds to £23 billion a year by the end of 2014. With the continuing move from defined benefit to defined contribution schemes, individual’s pension pots will grow and more people will have access to choose solutions that they believe will better suit their own circumstances.

The real winners

IFAs should benefit from an increase in business volumes, but must not be complacent. We believe the real winners from the coming boom will be those who best position their businesses now to take advantage of the new opportunities coming their way to advise clients, not just at the point of retirement, but in the decades to come.

Since August 2009 we have spent a great deal of time studying how a wide range of different types of IFAs deal with retiring clients. This research looked at the decision-making process used within the IFA firm – centering on the ‘fact-find’ and the ‘retirement options’ report – to see how information was gathered and whether recommendations embraced the full range of choice. We collected around 30 examples of these documents from a range of advisers including at-retirement specialists, members of nationals and networks, and directly authorised firms. The idea was to identify when and why they worked most effectively in order to be able to create an informed picture of best practice. There were a number of issues that occurred frequently.

The fact-find is a crucial document for the simple reason that if you don’t ask the right questions, you won’t be able to deliver the right solutions. We found that most advisers use the same forms for accumulation and decumulation clients, resulting in a lack of detailed questioning around retirement income needs and future objectives. We also found a strong focus on investment risk, almost to the exclusion of other types of risk.

Interestingly, the majority of IFAs we spoke to felt uncomfortable about the quality of the fact-finds they were using and were open and supportive of the idea of a specific questionnaire for retirees. They were unsure whether they were identifying all their clients’ key needs. One IFA, for example, acknowledged: “We don’t cover all the aspects of risk and we use the same approach for clients irrespective of their life stage – this concerns me.” Another said: “It may not be perfect, but at least we are familiar with it and we don’t have time to change it.”

We also found that several of these documents were out of date, making reference to the pre-A-Day rules or containing inaccuracies. The IFA business owners were motivated to improve the procedures by the potential to drive profits and improve client service, but felt they needed support and guidance to do so effectively.

Strengths and weaknesses

This research put us in a unique position to identify the strengths and weaknesses of different approaches and to use this knowledge to inform the creation of new sample documents. These revised documents have been commissioned from the Retirement Partnership Ltd., a consulting group specialising in providing information to advisers on the retirement market, and have been retested with a selection of IFAs who took part in the original research.

The IFA feedback – without exception – has been very positive and those advisers are now at various stages of integrating them within their own advice processes.

Mark Birkett of Austen Birkett Financial Planning Ltd. said: “I always make sure I cover all of the options in retirement with my clients, especially as innovative products become available. As a retirement options specialist, I am continually developing processes that fully assess client needs, covering all aspects of risk, while making sure ALL of the options are discussed. I feel this process, built by the Retirement Partnership, will help IFAs to ensure they avoid ‘pigeon holing’ clients.”

We would recommend that IFA firms take the opportunity to review these documents, available via The Retirement Partnership website, to determine if they can be used as a basis for modernising their advice documents, with of course their own compliance review of appropriateness. This will certainly save those busy running businesses a great deal of time and effort reworking the documents for themselves.

Kim Lerche-Thomsen is chief executive at Living Time