FG 21/3 – client objectives

Following on from our previous articles on FG21/3, we will look today at another of the interesting areas covered by the guidance. It goes without saying that the guidance itself is helpful, reiterating and emphasising previous rules and guidance and clarifying some areas that were arguably fuzzy before. However, as well as the actual content, it is interesting to note the amount of space devoted to certain aspects. That alone gives a pretty good clue as to what the FCA sees as the biggest issues around transfer advice.

One of the areas given much space in the paper is ‘client objectives’. That definitely ties in with our experience of reviewing transfer advice and we would go so far as to say that identifying and quantifying clear, client specific objectives is a widespread weakness in non-transfer advice too. So, the guidance on this aspect is certainly worth paying heed to. The summary below relates specifically to transfer advice but there is read across to other types of business too.

Identifying Client Objectives

The aim of establishing clients’ objectives is to understand their priorities, their plans and what motivates them. Objectives should not be generic, but should be personal to every client.

An objective is a desired OUTCOME, a destination that is desired at a defined future point. Destinations can often be reached in more than one way and, in advising on a possible pension transfer, all viable ways should be explicitly explored. So, an ‘objective’ along the lines of ‘You want me to review your pensions’ is not an objective at all, it’s not an outcome. You need to pin down the actual desired outcome. For example, the client might be enquiring about a transfer because he wants to raise some cash and sees the PCLS as a source of cash. Indeed, it is but it may not be the only option. In this case, the objective should be stated as ‘You wish to raise a cash sum of £X.’ The problem with the ‘review my pension’ starting point is that the case is immediately mentally pigeonholed by the adviser as a transfer case instead of the cash raising case which it really is. And that, in our experience, limits many advisers from the lateral thinking required to identify other options.

We often see product features being listed as objectives. The FCA is very strongly averse to features of the pension freedoms being stated as objectives. In particular, the use of ‘flexibility’ or ‘control of my pension’ as objectives is severely frowned upon, yet frequently seen. The problem with these is that they are not sufficiently personalised to enable a suitable personal recommendation, without further detail. Often, it would appear that such ‘objectives’ are adviser led but, if they do come from the client, they should be challenged to identify the underlying reasons why the client needs or wants these features.

So, how should advisers identify objectives? Skilled discussion around the client’s situation, using lots of open questions that require ‘free text’ answers is likely to be the most effective means. It is unlikely that a tick box questionnaire will do the job well. If a client is asked to choose from a number of generic options that most people would always agree with, this will not provide a sufficient understanding of what motivates the client.

For example, questions such as …

  • Would you like to retire early?
  • Do you want to maximise your lump sum?
  • Do you want to try to increase your pension income?
  • Do you want flexibility?
  • Do you want to control your own money?

… will lead most people to answer ‘yes’ if they are not made aware of the implications of each.

Clients sometimes have unrealistic of conflicting objectives. The first should be challenged at the fact find stage and the conflict should be resolved before attempting a recommendation.

A common conflict is where the client is attracted by the option of being able to leave residual funds on death but where the client’s desired income is likely to severely deplete the fund or even wipe it out by then. Such trade-offs need to be clearly explained to the client and priorities not preferences pinned down.

The FCA states “the adviser’s role is not to take orders but to make sure clients understand what they can realistically achieve”.

The paper includes examples of good and poor practice throughout. Here are examples relating to client objectives. You will note that the good example is firmly based around open questions and the poor practice is based on features of a drawdown plan.

Good Practice – establishing client objectives 

  • ‘To what extent are you prepared to live on a lower income so that you can leave assets to your children?’
  • ‘How important is it for you to retire early even if this could mean running out of money later in life?’
  • ‘Why do you want the higher amount of tax-free cash that a flexible arrangement could offer you?’
  • ‘Why do you want to draw out higher amounts of income in the early years of retirement?’
  • ‘How comfortable are you with the risk of running out of money in later years, and having to potentially rely on state benefits, if you have drawn higher income from your pensions in early years?’

Poor Practice – establishing client objectives

Advice based on the following objectives is likely to be formulaic and lacking robust credibility.

  • Mr D: early retirement, bigger lump sum, increase pension, flexibility, control
  • Mrs E: early retirement, bigger lump sum, increase pension, flexibility, control
  • Mr F: early retirement, bigger lump sum, increase pension, flexibility, control 

Why now?

Finally, the guidance also refers to the ‘Why now?’ question that, in our experience, advisers do not ask themselves often enough. Even if flexible drawdown does appear to be suitable for the client’s intended retirement plans, a client who is years away from the time when withdrawals will be required has no imperative to make the transfer decision now.

Here is what the FCA says:

“If a client is some way from retirement and has no clear idea of what they want from it, it may not be possible to advise them on a transfer, until they are closer to retirement. You should be asking the question ‘why transfer now?’ when your client’s retirement plans are unclear. Wanting to take advantage of a high transfer value is not generally a good reason on its own to transfer.”

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

It is undoubtedly true that many personal recommendations are substantially weakened by poor identification of quantifiable, client specific objectives. Although the guidance in FG21/3 relates to transfer advice, there are lessons to be learned for all advice.

Action Required By You

Review a sample of recent suitability reports and assess the quality of objectives stated. ATEB has specific experience of working with firms to create robust and compliant advice processes, including around DB transfers. Contact us to see how we can help.
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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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