As the cost-of-living crisis rages on, advisers are being forced to adapt to deal with clients experiencing financial hardship, perhaps for the first time. Here are some things they can do to support clients during these difficult times.
Vulnerability
The cost-of-living crisis has more than a purely financial impact, it has a mental impact too. Clients struggling to make ends meet could feel pressured to take more risk with their investments to combat current inflation or to try to mitigate increased withdrawals.
Where commission is paid, advisers should consider whether the level is commensurate with work involved, as sacrificing some could result in lower premiums for the client.
Advisers should look out for clients that display new signs of vulnerability and consider appropriate adjustments to their advice process. All recommendations must be suitable, based on the client’s needs, objectives and circumstances.
Protection
Clients struggling with their regular expenditure may consider cancelling their insurance policies.
Firms can help clients by reassessing their needs to confirm existing cover remains suitable. Alternative, more suitable and affordable policies may be available.
In cases where it would not be appropriate to recommend rebroking a policy, advisers should liaise with the existing insurance provider to see if any concessions can be made. The Financial Conduct Authority expects insurance providers to support those in financial difficulty due to cost-of-living pressures.
Firms must consider whether standard assumptions for cashflow forecasts – such as inflation – remain appropriate.
Where commission is being paid to the firm by the provider, they should consider whether the level of this is commensurate with the work involved in arranging the policy, as sacrificing some of the commission will often result in a reduction in the premiums the client will pay.
This ties in with the price and value outcome of the FCA’s Consumer Duty, which outlines an expectation for firms to ensure all products and services represent fair value for consumers.
Cashflow forecasting
Cashflow forecasting is a useful tool for helping clients understand the effect of their financial decisions over the longer term.
Firms must consider whether their standard assumptions for these forecasts remain appropriate or whether additional stress tests should be applied. For instance, with current CPI rates, inflation assumptions of 2% per annum might not provide clients with a realistic depiction of their financial circumstances, particularly for those close to retirement.
Annuity rates have risen significantly in recent months. While these may have been discounted at previous reviews, it could be appropriate to revisit them.
Current market volatility emphasises the importance of stress-testing forecasts to help clients understand ‘worst case’ scenarios. Firms should revisit their forecasting assumptions and stress testing policy. The rationale for the assumptions used and the stress tests applied should be clearly documented.
Annual reviews
During an annual review, firms should ensure they have a full and up-to-date understanding of clients’ circumstances, including:
Updating income and expenditure details: A client’s committed expenditure is likely to have increased since their last review. Full expenditure breakdowns should be obtained wherever possible, as these can help both the adviser and the client identify areas where expenditure could realistically be reduced (if necessary). Advisers should also consider whether clients might be eligible for additional government support and allowances.
Reassessing attitude to risk and capacity for loss: It’s possible recent changes to their financial situation could impact the firm’s assessment of the client’s ability to take this level of risk. Clients might also feel less comfortable with the potential downsides of their investments now, having witnessed recent market volatility linked to the war in Ukraine. It is important changes are recommended to a client’s investments where they are identified as no longer being suitable.
Revisiting the affordability of regular investments: Advisers should consider whether temporarily reducing the level of contributions could benefit the client. Advisers should remain aware of their clients’ longer-term objectives and help them to understand the impact that reducing or cancelling regular investments might have on their ability to achieve these. Cashflow forecasting can help here.
Reviewing income requirements: Clients may need to increase withdrawals from their investments or pensions to mitigate increased costs. Where sustainability of investments is a concern, cashflow forecasting can help the client to understand the impact increased withdrawals will have.
Where clients aren’t yet taking an income but have future plans to, their annual review will be a good opportunity to revisit whether their objectives are still realistic in light of current events. Advisers should also be aware annuity rates have risen significantly in recent months and that, while these may have been discounted at previous reviews, it could be appropriate to revisit them now as a realistic alternative to drawdown for providing income in retirement.
Elliot Daniels is compliance monitoring officer at Threesixty services
