RetiRement Advice PRocess Guide

PuttinG the client At the heARt of the Advice PRocess

Contents

4 Background

5 Agree retirement objectives and priorities

Know your customer

The key questions

Example of factors that should be considered

7 determining the most suitable investment strategy

The Five Pillars

The basic building blocks of the advice process

10 Research

11 existing arrangements

The suitability report

13 Recommendations and suitability Report

The suitability report should link to the Fact Find

14 client reviews

15 in conclusion

16 Appendix 1: fact finding questions

18 Appendix 2: Product matrix

19 Appendix 3: Good and poor practice

4

In the 2014 Budget we witnessed “the most radical change to pensions”. The result of which only cements the importance of putting the client at the heart of the advice process.

The original COBS guidance is still valid and will always be the main area for guidance especially COBS 9.3.3.

The Financial Conduct Authority (FCA) has increased their expectations of advisers with regard to their regulatory governance, with the most notable example being the Treating Customers Fairly (TCF) initiatives for example the expectation that advisers must fully manage customers’ expectations with regard to all areas of advice and product recommendation. The positives and the negatives of all parts of the recommended product or service must be explained to the client clearly and in words they can understand.

In 2012 and 2013 the FCA completed thematic reviews in relation to the specific areas of Pension Switches and Drawdown business. The feedback and suggestions on areas where advisers can improve in the provision of At Retirement advice has been included in this document.

In addition, recent Financial Ombudsman Service (FOS) rulings have made it clear that it’s important to not only focus on the quality of advice but the quality of the documentation that advisers provide. Numerous FOS rulings have referred to the lack of documentation surrounding client requirements and the reasons why a course of action was recommended.

From this we can see there are a number of questions that need to be addressed:

• Have the client’s needs and objectives been recorded fully?

• Does the Fact Find show that the client really needs all the features recommended?

• Have deposit based investments and vanilla offerings been discounted?

• Where a large investment is being made, should the investment be diversified across a number of providers?

• Have both the advantages and disadvantages of the recommended solution been discussed and recorded?

• Does the client understand what is and isn’t provided and what would happen if they wanted to make another decision in the future?

• Have the costs of each part of the solution been discussed, accepted and documented?

Background1

5

Know your customer

Although the FCA does not specifically prescribe the use of a Fact Find it is hard to find any other way of demonstrating that you know your customer.

The Fact Find is the key to any advice process and compliance departments will often avoid looking at the Suitability Report and decide what product they would advise the client take out based on the Fact Find alone. They will then look at the Suitability Report to see what the adviser has recommended and how close they come to agreement.

This test is usually where advisers’ advice fails the most. The majority of any remedial requirements will stem from this judgement alone!

It is essential that all the clients’ needs are documented in their own words to establish that the only recommendation that is possible is the one being recommended by the adviser.

It is clear therefore that the Fact Find should have sufficient soft facts (that are in the customer’s own words) to clearly demonstrate why the recommendation was made. The FCA views soft facts to be equally as important as hard facts.

the key questions

Establishing the clients’ retirement objectives and priorities will be key to not only recommending the most suitable strategy but also as an aid to defending a potential complaint should the client (or their dependants) seek redress at a later point.

Initial questions to enable the client to think through their retirement will be the familiar open questions or conversation starters:

• Where do you want to get to financially?

• Why is your goal important to you?

• What concerns do you have about reaching your goals?

• What have you thought of already?

• What else is occurring in your life that might impact on what we are doing?

• What does good look like as an outcome?

• What are the implications of doing nothing?

The main follow up questions will be around the areas of:

• Security of income/capital

• Flexibility of income/capital

• Expectation of income/capital growth

• Capacity For Loss taking into account client objectives

• Health and longevity

• Contingency planning

• Death benefits.

Agree retirement objectives and priorities2

*Further questions in each of these seven areas can be found in appendix 1

6

Through the use of questioning in these areas the adviser is able to help the client to see a vision of their retirement making it more tangible to them, which should help the client with their decisions.

It can be argued that good customer outcomes are driven by a good Fact Find, which is driven by good questioning, brought about by good language.

Another result of a great conversation about the client’s retirement is the ability to use the client’s own words alongside the recommendations in the Suitability Report.

example of factors that should be considered

It is important to remember that the different factors highlighted in the Fact Find will have a significant bearing on the advice that you give. It is most important that you consider:

• The age of the client (and any partner or dependants)

• The health of the client and spouse/partner (if applicable) and any concerns

• The client’s attitude to investment risk

• The clients capacity for loss

• The size of the available funds

• Their tax position

• Other resources available to the client to provide income in retirement

• The alternative options available to the client in meeting their objectives, for example, borrowing; refinancing existing borrowing; using savings and/or investments; doing nothing at present

• Whether a combination of products is required to meet the client’s needs

• The need for agreed regular reviews.

Please note, the above is an example and not an exhaustive list of factors.

7

Once there is an understanding of the client’s objectives, the next area to consider is the investment strategy that will help the client reach their goals.

The key areas of the advice process that will determine this will be in the areas of Attitude To Risk (ATR) and Capacity For Loss (CFL). When it comes to the client’s aspirations in relation to future capital and income requirements, discussions around Critical Yield (CY) will also be needed.

• Attitude to Risk = Risk willing to take

• Capacity for Loss = Risk able to take

• Critical Yield = Risk need to take

The adviser will need to discuss other areas that will then influence this such as:

• Personal circumstances

• Objectives

• Investment term

• Knowledge and experience.

Does the underlying fund match the client’s ATR and CFL following these discussions? If not, the discussion should be clearly documented using the client’s own words to justify that a revised strategy is needed.

It is ever more essential to document in this area, the soft facts that demonstrate the need for the guarantee being recommended.

It will also be important to demonstrate why retail deposit based accounts including National Savings would not meet the client’s needs, e.g. they do not provide access to the markets for long term gains.

Points to remember: An income guarantee must be used to satisfy an income need and a capital guarantee must be used to satisfy a capital need.

The term of the capital guarantee must match the time that the client needs the money, e.g. a loan trust for twenty years needs a twenty year capital guarantee. N.B. capital can still be accessed at any time however the guarantee will only apply at the end of the capital guarantee term.

Determining the most suitable investment strategy

3

Attitude to risk The risk one is willing to take

capacity for loss

The risk one is able to

take

critical yield The risk one needs

to take

8

the five Pillars

At their recent Positive Compliance workshops the FCA encouraged the use of five steps when using ATR profilers:

step 1

Risk profiling assessment

step 2

Ensure client understands risk

descriptions

step 3

Discuss other factors (personal

circumstances/term/CFL etc.)

step 4

Asset allocation discussion

step 5

Investment selection

Extra discussion and documentation is vital under step 3 please see example below:

Two clients come out as balanced according to the ATR profiler they complete.

The first client is a 64 year old mechanic looking to retire at State Pension aged with his £35,000 pension fund. He has no other money invested elsewhere and is looking for security of income.

The second client is a 55 year old barrister who “may never retire” but may reduce the days she spends in chambers. She has money invested in an ISA portfolio and an OEIC portfolio as well as a property she lets out. She is looking to be very flexible with her options especially around later life.

How would the discussions in these areas affect both of their eventual asset allocation and investment/product selection?

RISK PROFILING ASSESSMENT

RISK DESCRIPTIONS

QUANTIFY RISK, BE OBJECTIVE, DEFINE CATEGORY, AVOID

JARGON, BE BALANCED

OTHER FACTORS TERM, OBJECTIVES, UNDERSTANDING,

CFL

ASSET ALLOCATION

INVESTMENT SELECTION

9

the basic building blocks of the advice process

Most advisers will start with a recommendation for an emergency fund available in cash. This will equate to the client’s needs and take into account any other benefits that may be available from the state or employer. This could be six months expenditure or it could be an amount the client feels comfortable with.

The next expected recommendation is an ISA with a fully documented, robust and demonstrable reason should the client not wish to accept this advice.

Where there is a large investment, the adviser should also consider splitting the client’s investment with a fully documented, robust and demonstrable reason should the client not wish to accept this advice.

Discussions should take place around the suitability of any following recommendations with regard to the client’s tax position, i.e. bonds vs OEICs. Unit-linked Guarantee solutions are only available within tax wrappers (bond and pension); this could be a credible reason that can be used in conjunction with other credible reasons to substantiate why an OEIC can be discounted.

Pension switch processes are all very similar in style - comparing the client’s current plan with the plan recommended. It is essential the adviser goes through the advantages and disadvantages of moving, i.e. identifying all the costs (preferably itemised) of the new plan along with the cost of exiting the current plan. It must be clear that the client has been informed of and understands all the disadvantages and alternatives, as well as the advantages of the strategy recommended.

An observation from the FCA is that they witness advice processes that drive documentation around when things go well but pay little attention to advising the client on what would happen if they don’t. Again this is all about managing customers’ expectations.

10

Using the client’s answers to our Fact Finding questions an adviser can now look to research the strategy or strategies that would best match the client’s goals.

It is essential to show how the client’s existing arrangements have been considered as potential solutions and it may be an idea to do this as a separate process to the research on any new recommendations (see next section on existing arrangements for further detail).

Only after this has been done should any replacement or new investment be considered to achieve the client’s goals. This should clarify ideally using the client’s own words:

• Why the new arrangement is required

• Why the features of the new arrangement match the client’s needs

• Why the increased costs (if applicable) are justified

• Why other arrangements were discounted.

A matrix that can be used to crystallise the client’s comments into an objective summary from which a recommendation can be based can be found in Appendix 2.

The consequences of recommended actions must also be made clear. The following areas need to be considered and documented within the Suitability Report.

• Income tax position

• State Benefits including Pension credit

• Age allowance (reducing)

• Savings allowance

• Care funding

• Debt/bankruptcy

• Inheritance tax position.

Research4

11

An area of great concern for the FCA is that it appears that the existing product is very rarely discussed as a possible solution for the client. It is essential that the existing plans are discussed and where applicable discounted and then documented (known as the three Ds).

Its important to consider which features the client would be losing if they leave their existing contract:

• Guaranteed annuity rates available on the existing plan

• Guaranteed income rates available on the existing plan

• Guaranteed capital available on the existing plan

• Guaranteed death benefit on the existing plan

• Guaranteed bonus rates available on the existing plan

• Additional life cover available on the existing plan

• Likelihood of demutualisation windfall if the existing provider is a mutual company

• Details of any penalties on transfer

• Details of the charges on the existing plan(s)

• Market value reduction penalties for with profits funds

• Implications of being out of the market during the process

• Client awareness of the length of time the process will take

• Any alternatives including fund switches in existing plan, no action and employer’s scheme

• The service offering on the existing plan vs new strategy

• What happens to existing client contributions.

Existing arrangements5

12

According to the FCA on their recent Positive Compliance workshops the suitability report should, as a minimum:

• Restate the client’s needs and objectives

• Be clear and explain the reason for the recommendation (why is the product suitable for the client and what alternatives were discounted)

• State the objectives of the product

• State how the product features relate to the needs of the client

• Confirm why the level of cash lump sum is being recommended

• Confirm why the level of income is being recommended

• Comment on the client’s CFL and ATR in relation to their objectives, term, level of understanding etc. (FCA Five Pillars)

• State the circumstance in which the guarantee or other features would not apply

• State the product risks

• State the product costs

• Use appendicies to keep the report client friendly and salient points to the fore

• Record any loss of benefits as a result of a switch or transfer.

Similar options that could have met the client’s needs must be considered and discounted by referencing to the client’s requirements identified in the Fact Find. All options available need to be discounted and for all pensions business a stakeholder should be discounted (RU64).

All the costs in relation to the product and advice (including the cost of any existing product cancellation or encashment) should be documented and the client’s acceptance of these costs documented.

Most advisers will have templates but it will be essential that every Suitability Report is unique to the client and will fully document the reasons for the recommendation.

Whilst clearly labelled as Suitability Reports the expectations placed on them following many FOS rulings means they will also have to cover many areas of advice discussed that were deemed unsuitable for the client.

The Suitability Report should also now confirm the importance of and the delivery of the review process including the cost (also clearly set out as a monetary amount).

An overarching summary of other risks that will need to be covered in the report should include the following. This list for example now covers new risks that will need to be managed in a different way. aspiration risk without the compulsory maximum GAD or annuity purchase. Dependant risk with pension monies now available and accessible for their use as well as the client.

client RisKs Longevity

Mortality

Health

Dependant

Aspiration

sYstemic RisKs Inflation

Investment

Interest rates

Liquidity

Volatility

Timing

Provider

Counter party

Legislative

Regulation

Taxation

Recommendations and suitability report6

13

the suitability Report should link with the fact find

It is important to ensure the Suitability Report relates to the Fact Find – should the two become separated it should be possible to match the documents without reference to the client name and address.

For every recommendation the Suitability Report must reference a need identified from the Fact Find. A recommendation cannot be suitable if it does not match a client need.

Here the use of the clients own words becomes even more important.

A simple way of ensuring this is achieved is by taking a sheet of A4 paper and listing the client needs on one side and the features of the product that match these needs on the other. You should check that the Fact Find and Suitability Letter cover all the items listed.

An ideal strategy would be to restate the client’s own words as they link to recommendations, i.e.

• During the meeting you made it clear that... therefore I...

• A key requirement for you was... therefore...

• As you have... we have...

Without documenting the link between the features and the relevant client needs it will be assumed that the client is paying for extra product costs without good reason and this will therefore lead to a negative outcome.

Advisers are getting into the habit of handing their file to a trusted colleague for them to do a sense check before sending the file to compliance for checking, thus saving time by attending to any obvious documentation areas.

14

client reviews

In the post RDR environment, specifically in relation to ongoing adviser charging, reviews are ever more important from both a commercial and a compliance viewpoint.

Before you undertake a client review, you need to review all the information that is available to you that will help with your review. You should also have a process to ensure that the reviews happen on a regular basis. The FCA expects a robust system to ensure promised reviews happen.

• What are you going to do?

• When are you going to do it?

• How much will it cost?

You should ensure that the answer is “yes” to the following questions after your review:

• Does the client understand the value of the review?

• Does the client understand the value of your advice?

Client reviews are also a key concern for the regulator with regard to how the adviser delivers on their overall service proposition as discussed in the client engagement process: is the client receiving what has been promised?

As a financial adviser, it is your responsibility to deliver the following to your clients:

• Identify their financial goals

• Review any changes to their goals on a regular basis

• See how your their personal circumstances have changed

• Review the performance towards their goals

• Review any legal, taxation and product changes that may affect your their investment.

The FCA has advised that their emphasis on this will only increase.

Client reviews7

15

in conclusion

With the new Pensions Freedom clients will have greater choices than ever before and advisers will have an even greater opportunity to demonstrate their value and skill in this area.

With this increased opportunity will come increased risk for not only the client but for the financial adviser and the financial advisory practice.

Now it is more important than ever to ensure the client is at the heart of the advice process and a full understanding of all their objectives is gained. This is key to not only recommending the right strategy for the client’s retirement but with the use of the client’s own words ensures that should things change clients will understand why they did what they did.

The FCA is clear that advice in the area of switches and drawdown can have positive outcomes for clients and by using this guide we hope that the subsequent documentation can match the quality of the advice given.

To borrow a comment from the regulator - “poor reports don’t always mean unsuitable advice but increase the risk of poor outcomes in terms of client clarity”.

16

1. security of income - establish client’s need for a secure “base” income from their pension investments

What level of income do you need to be secure?

When do you intend retiring?

What are your likely outgoings in the short term?

What are your likely outgoings in the longer term?

Do you know what your entitlement to state pension is and when you are likely to be in receipt of this?

What sources of income do you have to meet your living costs in the immediate future / longer term?

Would you like to protect your income against inflation?

Describe how your life would be if your future income was below your expectation.

2. flexibility of income - establish need for future living income and lifestyle income requirements

Going forward what level of income would you expect to have?

How much are you expecting to spend on life events?

Going forward what additional income to your secure income do you think you need?

When are you likely to need it?

What will it be used for (e.g. gifting, dependants’ support)?

Do you have any debt to pay off?

If so when do you need/wish to repay this?

Are you prepared to take some risk in order to maximise your income?

What would you be prepared to pay to take the risk out of your pension investments?

Do you know of any future lifestyle expenses that you will need to meet including financial gifts?

3. expectation of income/capital growth - establish client’s need for income levels/flexibility and the wish to retain their wealth

What are your expectations for growth in your wealth and future income?

Are you expecting any additional assets, money or income in the future such as legacies, maturing plans?

How much control would you like to maintain personally over your investments?

Are you prepared to pay to review your financial priorities throughout your retirement?

4. level of risk tolerance - establish client’s attitude to risk and willingness to pay to de-risk investments. is this in line with their financial and personal capacity to take risk?

How much risk can you really afford to take in line with your priorities?

- Can you cope with a 20% fall in fund value

- Can you cope with a 50% fall in fund value

How much risk are you comfortable with?

What level of your funds would you tolerate losing in order to maintain the income you need?

Would you be prepared to pay to de-risk your investments?

Appendix 1 - Fact finding questions8

17

5. longevity - establish client’s understanding of the effect of longevity and the impact their health has on the different planning and product options available

What is your current state of health?

What is your family medical history?

Do you think you will outlive your assets?

How much longer do you think you will live?

Why?

Do you worry about whether you will have enough income to see you and your dependants through to death?

Do you smoke?

Do you or have you ever taken prescription medicine?

Have you ever been hospitalised for a medical condition?

6. contingency planning and care in later life - establish client’s needs to make provision for unexpected events such as when health fails and understands likelihood of self funding and costs of care

Have you thought about your planning for future needs and events?

What provision do you think you need to make for you or your dependants’ care in later life?

How much cash do you need in reserve for emergencies and unexpected events?

How are you expecting to pay for care in later life for yourself or your dependants?

What levels of income do you think you might need to fund this and when?

Would you want to make choices yourself regarding this or are you happy for others to make these decisions for you?

Do you want members of your family involved or informed of your care planning decisions?

Do you have an up-to-date power of attorney?

7. death benefits - establish client’s need to leave income/legacy for dependants and if appropriate to involve the wider family in the advice process

Who might suffer financially when you die?

By how much?

Do you need to have provision to provide an income for a dependant?

Is it important to leave a legacy?

Do you want any members of your family to be involved or informed of your planning decisions?

Do you want to make provision for Inheritance Tax planning?

Do you have an up-to-date will?

18

scenario /

policy size

Annuity investment linked Annuity

fixed term Annuity

Guaranteed drawdown

drawdown PPP

drawdown siPP

income security

income flexibility

income growth

AtR cfl

longevity cover

contingency and care

death Benefits

totAl

Appendix 2 - Product Matrix9

This matrix can be used in conjunction with the seven questioning areas discussed within this guide to provide an objective document as to why the advice process focuses on certain product recommendations.

For each product column award points for how the product matches the client’s requirements in each need area

• 2 points if it matches their requirements

• 1 point if it neither matches or opposes their requirements

• 0 point if it opposes their requirements

Add up each column to indicate the product area that is most likely to match the client’s requirements.

Where there is no clear outcome it may be that a blended solution is the most desired outcome.

19

Appendix 3 - Examples of good and poor practice

10

An example of good practice 1

The client is looking for income with access to the markets to benefit from potential returns over the long-term, along with certainty of the level of income they will receive. The client would like to see any investment gains used to increase their level of income over time.

This will clearly demonstrate a need that is met by our product features. (Although any alternatives such as low risk portfolios, should be discounted).

An example of poor practice 1

Client wants an income which cannot fall.

This shows a lack of discussion in this area and a need that can be met via a number of products, i.e. deposits and fixed income investments.

An example of good practice 2

The client is unhappy at work and really starting to look forward to his retirement, he has five years to go and is concerned that he may not be able to afford to retire.

He is particularly worried about what would happen if the markets fell. The last thing he wants to do is to be forced to carry on working. You complete a budget planner and establish that because he has paid off his mortgage he could afford to live on £1,000 per month, which takes into account the likely changes to his expenditure when he retires. You complete the risk profiler and although the client is and has always been an adventurous investor you recommend the Retirement Portfolio – Secure Income Option (deferred) with an income of £550 per calendar month, which together with the state pension will meet his income needs. The client’s personal circumstances and the conversation is documented in the client’s own words.

example of poor practice 2

An adviser has a 40 year old client who he has previously switched into a multi- asset fund in a personal pension. The fund has gone down in the last six months and the adviser is nervous about discussing the value because he sold the fund based on performance and didn’t fully explain that this could happen. The adviser decides to sell the Retirement Portfolio – Secure Capital Option rather than reassuring the client that the long term strategy of the multi- asset fund still meets his risk profile and objectives. The template suitability letter is not personalised other than ‘You liked the idea of the Secure Capital Value because it will give you peace of mind’.

20

examples of good documentation

Examples of good documentation are shown below but it is expected that the client’s own words should be used at all times.

Guarantees

fact find - Client has expressed a wish to explore guarantees.

Suitability Letter - Having researched the whole of the market, MetLife are the only firm to offer phased retirement with guarantees. They also offer a deferral bonus. MetLife also has external fund management through BlackRock’s BMACS (BlackRock Multi-Asset Client Strategy) team. BlackRock is one of the world’s leading providers of investment, advisory and risk management solutions, the portfolios managed by BlackRock are designed to reduce volatility which means the fund is much more stable in volatile markets.

flexibility

fact find - Client would like to use phased-drawdown when she retires - this is to defer annuity purchase and to maximise death benefits.

Phasing will start immediately, but client is unsure when she will need more Pension Commencement Lump Sum (PCLS). This could be six months, two years or four years.

suitability letter - With MetLife, the client can take as much or as little PCLS as she requires, and at a time that she requires it. She will also have the certainty of a guaranteed income when PCLS has been exhausted.

volatility

fact find - Client is concerned about stock market volatility affecting her income level in the future.

fact find - Client wants a guaranteed income with the potential for increases when she retires.

suitability letter - MetLife has a two-pronged approach. Firstly, their BlackRock portfolios are designed to reduce volatility which means the fund is much more stable in volatile markets. Secondly the guarantee insures that future income and death benefits can’t fall.

What if you change your mind

fact find - I have discussed with the client that the guarantee is for a capital amount at the end of x years. She understands and is happy with this as it meets her requirements.

suitability letter - The guarantee is for a capital value at the end of x years. Should you wish to access your money at any time outside of this you will only have access to the underlying fund value.

21

discounting an annuity

fact find - Client is in good health and wants some income now, but doesn’t want to lock herself into an annuity at the moment.

suitability letter - MetLife’s Secure Income Option offers a guaranteed income, now or at a time in the future. Using phased drawdown also means that the client is not buying her annuity at a time when annuity rates are at an all time low.

death Benefits

fact find - Client wants the fund to pass to her spouse/children at the time of her death.

suitability letter - MetLife’s Secure Income Option and Secure Capital Option have a guaranteed death benefit (at least the initial investment less any withdrawals) or the fund value if greater.

mitigating drawdown risk

fact find - Client likes the flexibility that drawdown gives. However she is not comfortable with volatility of the markets and the effect this could have on her income. She is currently concerned about the current economic crisis and would therefore also like some certainty over a minimum level of income.

suitability letter - The MetLife guarantee removes the risk as it provides a guaranteed income for life based on an age related percentage of the Secure Income Base. The MetLife guarantee insures against poor sequence of returns, volatility and mortality drag as income is insured for life.

Why not fund switch?

fact find - Client does not want to go into cash/low-risk funds as inflation will erode the value of her fund.

suitability letter - At present low risk funds return yield below inflation.

suitability letter - Having spoken with her existing providers, her current plans do not offer funds that take her into retirement with no income risk. Her current plans do not offer guarantees that would benefit the client.

charges

fact find - I have discussed with the client that a guarantee comes at an additional cost. She is happy with this.

suitability letter – There is an additional charge for the guarantee in my recommendation, which insures future guaranteed income or guaranteed capital and death benefits, whilst allowing you to benefit from the performance of the underlying funds.

Please note, the above is an example of good practice when recommending unit-linked guarantees and is not an exhaustive list.

Want to find out more?

0845 370 6040 salesresource@metlife.com www.metlife.co.uk

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