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Badly drawn ploy strikes bad note

IFAs are often told by product providers about great potential markets but find that the reality is very different. One area that is likely to be attractive to providers and IFAs is clients in or near retirement.

Demographics coupled with greater pension awareness and funding from the late 1980s onward will ensure an enduring market. Clients will increasingly need advisers to help them determine the best options from phased retirement, income drawdown, the proliferation of new annuity variants and clearer disclosure of the open market option.

Regulators and PI insurers have, however, expressed concern that some advisers have abused clients&#39 inexperience by recommending the options with the most remuneration. It is a sad fact that in some cases this is true but this is also an area where many advisers are doing a lot of good for their clients. Formulating further regulation could create rather than solve problems if it is not handled carefully.

The recent poor run of equity performance has obviously hit those with phased, drawdown or unit-linked annuity products. Insurers have so far managed to protect the values of with-profits annuities but even here the danger of actuaries taking out their red pens may be imminent if a recovery does not occur soon.

The adviser who has done a good job with a spread of investments, reasonable charges and a client who understands why they are in the product should survive with the client relationship intact. But what about those with less integrity?

I know of advisers who have set up drawdown accounts and taken commission of 6 per cent initial and 1 per cent trail. They must surely be terrified that these clients will see their funds and income fall and instigate a complaint. Unfortunately, this type of practice is likely to lead to bad press comment and regulatory and professional indemnity pressure that will affect us all. What are the simple checks to ensure this business area has been dealt with properly?

•Fact-finding should cover health, other assets/income, attitude to risk, dependants and death benefit issues.

•Existing pension fund information to be gathered should include any penalties on transfer and any guaranteed annuity rates that may be lost.

•Product recommendations should cover the reasonableness of charges, fund choice and performance, ability to accept protected rights if needed and a Sipp option as the cost and resetting of the GAD rates could make it disadvantageous to transfer into a drawdown product.

•Portfolio design needs to take into account that drawdown especially requires a diversified income portfolio. There must be sufficient monies set aside in low-risk funds to provide income in the short term, allowing the more volatile growth funds time to produce returns. Also remember that income can be taken from funds with most providers, giving the option of avoiding selling units at a loss in depressed sectors.

•In checking that the client&#39s income requirements are met, the adviser must also question whether the client is getting the income they need in the most tax-efficient way.

•Does the reasons-why letter accurately cover the client&#39s situation and include the necessary risk warnings?

•Regular reviews are essential. An annual review, with the client having the option to ask for an extra review mid-year if they have a change in circumstances, is the best balance. More frequency can lead to being too interventionist and, in highly volatile markets, a decision could be made that will look inappropriate in a few weeks. Also, greater frequency will be more costly

What needs to be included in a review?

•Personal circumstances – health, beneficiaries, finances, etc – should be reappraised.

•Is the level of income sufficient, too high or too low?

•The product should be compared with an annuity. Although clients are invariably using drawdown because they feel annuities are unsuitable, it is useful to show them what annuity could currently be bought from their fund. Some clients might be looking to move progressively into annuities, particularly as they approach 70-75, to avoid the risk of rates being worse at 75.

The remainder of the review focuses mostly on the investment portfolio.

•How is the manager performing against their peer group? How have individual sectors performed? Are any changes needed in light of performance to rebalance the portfolio? Finally, where should future income be drawn from?

I feel the knowledge gained from holding either the G60 or equivalent or the CII K10 Retirement Options exam is essential for providing the right advice in this area. For peace of mind and to keep their PI insurers happy, practioners should look to take these exams. For those who feel their knowledge is sufficient but are exam phobic, a file review by their network or a third-party specialist may be appropriate.

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