For instance, attitude to risk questionnaires used for clients approaching or in retirement are often the same as those used when building wealth.
This means the assessment generally focuses on the client’s view on investment volatility and risk to capital, whereas to assess the attitude to risk of people in decumulation properly, advisers need questions that specifically test how they would feel about coping with loss of income.
Aligning investment risk
Similarly, most investment funds and portfolios are designed for accumulation and risk assessed to match those with a growth objective. Even investment solutions with “retirement” in their name are often inefficient at generating income, and most do not match the risk profiles of the majority of retirees.
EV also found that very few funds are good at generating both fixed and inflation-protected income, due to the different investment requirements for each. This means the adviser needs to know at the outset whether their client wants a fixed or inflation-protected income as it is likely to impact the resulting investment selection.
Several years of data from EV’s ATR questionnaires show that more than 80 per cent of retirees are at the medium to low end of the risk spectrum.
However, EV’s analysis of 170,000 UK retail investment funds and portfolios found very few funds cater for their needs, with most funds, including those typically used for drawdown clients, sitting at the medium to high end of the risk spectrum when it comes to income risk.
While consumers have been insulated from some investment risk in recent years due to largely benign global equity markets, a sharp reversal could result in serious loss of income and potentially considerable hardship for many retirees.
Risk-rating methodologies for investment solutions used in drawdown often focus on capital volatility, rather than income sustainability.
Volatility is fine for those in accumulation, because they are trying to grow their pot over a time horizon, often a long one if they are saving for retirement. But income sustainability is generally more important in decumulation, to avoid running out of money too soon.
For those in retirement, simply looking at volatility does not help as it is a fundamental mismatch with the objective. Although lack of information and inconsistent approaches to risk assessment make it almost impossible for advisers to compare investments properly and complete the due diligence required as part of the consumer duty rules.
Given that the FCA’s thematic review of retirement income advice further emphasises advisers’ obligations to ensure suitability and avoid foreseeable harm, ensuring that retirees are not being exposed to more risk than they feel comfortable should be seen as central to the decumulation advice process.
