The retirement income specialist said that the recent Financial Conduct Authority’s comments raising concerns about how professional advisers assess their clients’ capacity for loss contrast with the free for all among those retirees making their own decisions.
Stephen Lowe, director of Just Retirement, says:
“The golden rule for anyone taking risks with their money is not to bet more than you can afford to lose. That concept is enshrined in regulation because advisers must assess the client’s ability to bear losses – in other words how much downside they can take before it has a significant effect on their standard of living.
“It needs to be done properly which is why the regulator raised concerns that some advisers may be mixing up capacity for loss with attitude to risk. If someone has no capacity for loss then it doesn’t matter how cautious or adventurous they think they are because they simply can’t afford to put any money at risk.”
He said that the elephant in the room is that while the “pros” are being closely scrutinised to ensure they are calculating capacity for loss correctly, the “amateurs” acting without advice now have complete freedom to do what they want with their pensions.
“There are already concerns from organisations such as the Financial Services Consumer Panel about the growth in non-advised sales of more complex income drawdown solutions. How many of those choosing to go it alone will be considering their capacity for loss?”
Stephen Lowe’s comments came after FCA technical specialist Rory Percival was quoted as saying the regulator was concerned some advisers were still confusing capacity for loss with risk profiling. He said that rather than accepting an emotional response from the client, advisers should do what they can to calculate an accurate number.
“We have done a lot of work with advisers in this area because capacity for loss is at the heart of good financial planning in retirement,” said Stephen Lowe. “The question is, do we honestly think those attracted to drawdown options under the new rules will be doing the same?
“The sensible solution is to guarantee the basic income you need before deciding whether to take a chance on the rest. Our fear is too many will see the potential upside without fully considering the impact of the downside.”
