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Suitability 101 – is there a need?

The term ‘need’ according to the English dictionary:

‘Require (something) because it is essential or very important rather than just desirable’.

Not that there is necessarily anything wrong with doing something because it is desirable, or a nice-to-have, as opposed to being a true ‘need’ if you have the scope. But ‘desirables‘ and ‘nice to haves’ need to be considered subordinate to true, essential priorities.

In any walk of life, particularly financial planning, we sometimes have to undertake a balancing act. In its simplest terms we can’t always meet every financial objective we have. So it becomes a question of ranking them in order of priority. The absolute top priorities first, followed by other needs and then the desirables.

How does this pan out in terms of our role as advisers? What it comes down to is an ability to identify where a client’s desired course of action falls on the spectrum. Is it essential? Is it simply a nice-to-have? And if the latter, is meeting it really in their best interests when weighing up their overall situation and other needs, both present and likely future. The latter is an essential part of the equation when advising on an irrevocable transfer of safeguarded benefits, the impact of which may be felt for the remainder of a client’s lifetime – in some cases half a century or more.

Assessing need is not about simply recording, or even suggesting, rationale which would serve as justification for what the client proposes to do. It is about evidencing proper challenge and some element of devil’s advocate. It is about suggesting alternative solutions which may be able to meet the client’s needs. This is particularly important in the context of defined benefit transfers, where the regulator’s starting position is that a recommendation should be considered unsuitable. If there is an alternative which could have met the client’s needs equally comprehensively, the transfer is likely to be unsuitable. It is therefore key that challenge is evidenced and that serious discussion, rather than lip service, is afforded to alternative options.

Generally speaking, where a client is not in a position of looking to crystallise their benefits in the short-term foreseeable future, a decision to transfer has to be considered questionable. The further from retirement the client is, the more questionable it becomes. Why now? People’s circumstances and risk profiles can and do change significantly when the timescale is measurable in years as opposed to months. Why rule out a valuable safeguarded benefit option when you may come to regret it at retirement stage?

The key principle when giving retirement planning advice is to outline the client’s financial objectives and put together a plan aimed at meeting as many of them as possible. Firms should take great care where the client stats that they wish to transfer because of the high transfer value on offer. If a transfer of safeguarded benefits is not clearly in the client’s best interests then the transfer value is academic – they are best advised to stay put. I can understand why firms are jumpy on this point – if the transfer value subsequently drops then it brings into play the question of clients trying to claim against the adviser. This is why a robust advice process is paramount. Where the firm is particularly risk averse, simply declining to provide advice could be considered. But this point is not a convincing need.

Likewise, concerns about the former employer and/ or the scheme need to be treated with care. We have seen fallings out with a former employer and a desire to cut ties cited as a reason for the client wanting to transfer. This, in itself, is not good enough. Any future dealings would normally be with the scheme trustees rather than the employer itself. Emotive concerns often have little grounding in logic and we would expect an adviser to give advice as opposed to simply taking an order without question. Concerns about the financial security of an ex-employer’s scheme may, under some circumstances, be justifiable grounds for a recommendation. However, the adviser would need to consider all of the facts, the funding level, whether a recovery plan is in place, the length of this, the financial strength of the employer. Defined benefit pensions are protected to 90% by the PPF. A transfer into a flexible arrangement would risk a higher loss than this and therefore has to be considered questionable where the client is risk averse.

Another one we come across a lot is death benefits, i.e. the desire to leave a better legacy to family, potentially non-dependants. This should be considered a nice-to-have and subordinate to the client’s own retirement income needs. It should not generally be the main driver, particularly where the client is some years from their retirement date. After all, if the member was so concerned about leaving more funds to their families in the event of death prior to retirement, they’d have taken a life policy, right? This one is generally a nice-to-have as opposed to a true need.
That is not to say that it may not be justified in rare circumstances. I saw a case the other week where the client, who was an experienced and sophisticated investor with sufficient retirement income and significant assets, transferred into flexi-access drawdown. He did not consider that he needed the pension and wished to leave it for his children as opposed to taking income he did not need and which would simply accumulate back into the estate for IHT purposes. However, this case had a specific and justifiable personalised motive.

I can see why this one may make people jumpy as well. After all, if you recommend to stay and the client passes away, it opens up the possibility of challenge from the descendants on the grounds that the recommendation has cost them death benefits. In the absence of any significant precedent, nobody can be certain how FOS would interpret this. But our position would generally remain that real, convincing client needs trump ‘nice-to-haves’. Again, it is vital that a robust record of the rationale for the advice can be produced.

The most robust defined benefit transfer cases identify a specific need and subject it to appropriate challenge where necessary. They set out why it cannot be met via the existing scheme and how the proposed transfer would enable the client to better achieve an end appropriate to their circumstances.

I look forward to seeing them in due course.

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