Importantly, cash flow needs to be based on the same risk measure you used to talk to clients about their investments, rather than simply on a finger-in-the-air return assumption.
With an understanding of the client’s attitude and capacity for risk in place, the third question is what a suitable product looks like.
The FCA’s concern here appears to be that too many clients are being swept into drawdown when it may not be the right answer for them.
The emergence of hybrid products that sit between drawdown and annuity also opens up some new options.
The question of product is one where the client’s preferences need to be explored very carefully, due to the need to balance seven factors: the certainty, accessibility, consistency and flexibility of income, the need for inflation proofing, the need or desire for a lump sum, and the desire to leave a legacy.
Very few people can have all of these, and it is vital to understand what the client values most and what they are prepared to do without, both from a regulatory perspective and simply to manage expectations.
Capturing priorities is best tackled through a questionnaire and subsequent discussion of the findings.
Technology can help, enabling the client to unpick, weigh and articulate their needs and wants, and enabling the adviser to document exactly where the client sits on each of the seven considerations, evidencing suitability.
Fourth and finally, there is the question of how to find the right investment solution.
If the answer is not an annuity, how much risk should the client be taking, in terms of both risk to capital and risk to income, and how do you evaluate solutions to ensure they align with the client’s needs and preferences?
This is a challenge that has been around for years, particularly given the lack of industry standardisation on risk rating for decumulation strategies.
However, many firms are now getting to grips with it and developing their centralised retirement propositions.
Good fund analysis makes this easier, providing breakdowns of the nature of total returns and the consistency of income to support the mapping of solutions to client needs.
Retirement planning is undoubtedly one of the most challenging aspects of the adviser’s role.
As the regulator notes, the risk of harm from the wrong advice is particularly high at this stage of life.
But if you get it right, the service you provide is invaluable.
And robust technology that helps you to build a complete picture of the client’s risk tolerance and priorities and translate that into a solution makes the job much easier.
Ben Goss is chief executive of Dynamic Planner
