I was delighted to see that the findings of the FCA’s review of retirement income advice, released in March this year, were presented in such a clear and constructive way. For those who haven’t read the findings, it systematically lays out the FCA’s areas of concern, sets out their expectations, and supplements these with examples of good and poor practice.
But over six months on, I’m wondering whether this helpful approach may have led some to underestimate the importance and urgency of the challenges in the retirement advice sector. Despite being accompanied by a Dear CEO letter setting out the regulator’s key concerns and directing firms to take action, it appears that the review hasn’t generated the activity the FCA is expecting. Indeed, having seen the initial findings of an adviser survey we’ll be publishing with NextWealth next month, I wonder whether some firms have taken the regulator’s concerns on board at all.
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The FCA’s recent portfolio letter setting out its expectations for financial advisers makes it clear that retirement income advice is at the top of the FCA’s priorities for the next two years and that firms need to act quickly and substantively to make sure they are meeting regulatory expectations. It encourages firms to take heed of the Dear CEO letter and promised further commentary on the market in the first quarter of next year. That doesn’t mean that firms can wait though. The review findings and Dear CEO letter provide clear direction for what is expected of firms and so work should already be underway to align advice approaches accordingly.
Risk assessment
Among the key concerns highlighted in the FCA review is that firms aren’t always assessing risk in retirement adequately and recognising that the nature of risk when decumulating wealth is very different from that for clients who are accumulating it. This change in the nature of risk demands that firms also consider how their investment approach needs to change, and we are seeing increased interest from firms who are grappling with this question.
Managing risk in retirement involves thinking about risk in terms of the achievability of objectives, especially the ability to deliver a durable and stable income. The traditional approach to risk management with its focus on volatility is not enough to achieve this. While volatility is important, it doesn’t tell us much about the pattern of returns which is what really determines the durability of income.
Many clients will need to take some risk in retirement to generate the returns they need to achieve their objectives. But focusing on the wrong risk measures can lead to poor outcomes either by not recognising where risks really lie or by adopting too cautious an approach. Our retirement investment framework helps advisers look beyond this to understand what really drives retirement risk and how they can address this for their clients.
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Retirement income advice isn’t the only priority identified by the FCA. Its work on ongoing advice is also identified as an area of focus. But with ongoing reviews being an integral part of retirement advice and featuring in the list of concerns set out in the Dear CEO letter, it seems firms cannot afford to delay further in looking at how they serve retirement income clients.
Richard Parkin is head of retirement at BNY Investments
