Regulation & Compliance Challenges: Suitability and Sustainability

With a growing interest in retirement advice as more clients go into drawdown, doing the right thing by the client has never been more important. The regulator is focused on suitability, sustainability and the right advice at the right stage of the clients saving and spending journey.

Current State

The last suitability advice review was done four years ago with another due in 2020. But like with most things that were expected to happen last year, this was delayed till 2021. Broadly speaking, the initial review covered retirement income, investments, and accumulated pension savings and outcomes were broadly categorised into suitable, unsuitable, and unclear.

It will be interesting to see the findings of the next review, once it is complete, for many reasons – not least because of the way advice business has been conducted throughout the pandemic.

Advisers received high marks for the first review and it’s safe to say the regulator was broadly satisfied with outcomes. There are however areas that were classified as unsuitable or unclear that need revisiting.

An accurate Risk Score

One such area is risk profiling. There was no ambiguity in the opinion of regulators about the sort of risk profiling tools used by advisers in a bid to make recommendations. Did these tools arrive at outcomes that did not match the types of risks clients were willing to take? The regulators were clear on the types of risk profiling tools that should form a central part of the advice process. Did these tools help in arriving at suitable outcomes by truly considering clients’ risk objectives, for example?

We believe these tools should look at a client’s attitude to risk in the context of their investment knowledge and experience. Whilst a risk “score” can be swiftly produced after running through some questions, do these tools genuinely consider the investment knowledge of the client?

Capacity for loss is an area that still divides opinion, depending on which school of thought you belong to. That said, shouldn’t a risk profiling tool also have the ability to measure the client’s likelihood of financial security should the markets plummet and hit the value of their investments hard?

The sequence of risk

To assess suitability, it’s also important to recognise the impact the sequence of risk might have on portfolio longevity as well as considering other factors such as inflation and taxes. Such a framework will not only deliver sound evidence-based outcomes but will also personalise each client’s individual retirement plan.

Showing the client their future

When looking at the report’s advisers provide their clients, clarity is king. It’s personal preference, how long should it be and what information should be shown but risks and client goals must be front and centre. Once these key elements are covered, the report must be easy to read and understand.

These documents should clearly show that the advice given is suitable to that individual’s circumstances. There isn’t a one-size-fits-all approach to retirement and nor should there be.

Hopefully, in the second half of the year when the FCA publishes its findings, the advice profession will be able to give itself a pat on the back.

Toyosi is the Pension & Technical Consultant at Timelineapp. His experience is in Financial Services and consulting (“Big-4”). Toyosi has the IMC qualification and is a member of the CFA Society of the UK and the Chartered Insurance Institute. Toyosi is one of our content contributors and is often writing articles on retirement and the sustainable withdrawal framework.


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