By Tim Gosden, Head of Strategy for Legal & General’s individual annuity business
Why Guidance is needed?
There was a debate in the House of Lords in January this year that sought to answer a very simple question ‘Are annuities fit for purpose?’ At that debate Legal & General proposed that every person in the process of buying a retirement income product deserves and should get an informed discussion with a knowledgeable person about their retirement income options. The conclusion from the debate was that annuities do suit many consumer needs in retirement and that there is definitely value for money to be had if consumers shop around the market but it was the ‘informed discussion’ proposal that really stole the show.
The rationale for the Legal & General proposal is the concern that many consumers are making poor choices when arranging their retirement income, which includes not shopping around for the best deal. This is primarily because they go it alone without the assistance of an adviser or even their provider. There are lots of reasons why people do this; some don’t know advice or help is an option that is available to them; others don’t trust advisers; some simply don’t want to pay for advice and for some the focus is purely on the receipt of the tax free cash sum and not the important choices concerning their retirement income. It is also a fact that many people rely on friends, family or the pub for ‘advice’ but these personal contacts may not be informed enough to help them make the most sensible choices. So the principle behind the ‘informed discussion’ is that everyone should get the opportunity for a chat with someone ‘in the know’ about all the options available to them.
Then along came the Budget with a promise from the Government that from April 2015 consumers will have unfettered access to their pension savings. However, given the much wider range of options available to them, that promise of ‘freedom and choice’ and the personal responsibility for their retirement savings brings with it the potential for even more consumers to make errors and mistakes with their retirement options. So the Guidance Guarantee is being introduced as a safeguard for consumers to help ensure that they have at least some understanding of all the options available to them and hopefully this will result in them making more informed decisions.
Who should provide the Guidance?
In the Treasury consultation paper, reference is made to the Guidance being ‘impartial’ - meaning whoever provides the Guidance is able to act fairly because they are not personally involved. So Legal & General along with some other providers believe that providers should be precluded from giving the Guidance. While there is no doubt that providers could offer the Guidance if it were to be wrapped up in a blanket of regulation and compliance, there would continue to be questions around impartiality, given that providers do have an interest in selling a product to the customer.
So while our view is that the Guidance should be delivered by an independent body, that’s not to say that providers won’t have a role in assisting, educating and signposting their customers to the Guidance provider in advance of their Guidance conversation. Most providers already offer a great deal of help and assistance to their customers in accordance with the ABI Code of Conduct and so in this respect they will continue to play a crucial role in their customers’ decision making processes. However, there needs to be a clear demarcation between what constitutes the ‘help and assistance’ that providers offer and the ’impartial guidance’ to avoid providers perhaps being accused of giving non-authorised Guidance.
Scope of the Guidance
The content and scope of what’s included in the Guidance is very important because it needs to be focused on consumer needs and not try to shoe horn people into a preconceived process. For example, if the purpose of the Guidance is to provide consumers with an overview on the whole of their financial affairs in retirement that is likely to require access to some very detailed information, covering a wide range of aspects, prior to the Guidance conversation. However, this may not be what all consumers want or need. Some may just want clarification on a few straightforward questions while others may simply require verification of information and facts that they already know. So to get people engaged the Guidance needs to be flexible depending on their needs but with the scope to probe further and discuss other aspects as required.
The outcome of the Guidance conversation is equally important because having potentially disclosed all about their personal circumstances some will end up asking ‘What do you recommend I do?”. So to manage expectations, consumers should be under no illusion that the Guidance is not providing advice; the outcome will not be a definitive course of action or a recommendation and in some cases the result may well be that the consumer now needs to seek financial advice. This clarity about the outcome is crucial otherwise the Guidance conversation may leave some people disillusioned and disappointed.
Where a referral for advice is the outcome, then a seamless transition from the Guidance provider to an adviser will be required. The alternative of pointing someone in the direction of a faceless adviser directory I suspect will be unpopular, particularly if the consumer is placed in situation where they have to explain everything again to someone else.
Is the Guidance Guarantee enough?
At the end of day, the introduction of the Guidance Guarantee arises from the central industry issue that too few people are receiving financial advice and it’s purpose is to act as a safety net to help alleviate that situation.
Given the scale of the changes from next April, the extra choices and extra complexity, I believe that there should be an equal focus on promoting the value of financial advice and making advice far more accessible and affordable to the mass market than it is currently.
There is definitely growing evidence that more consumers will be seeking advice. Qualitative consumer research we carried out in May this year revealed that 20% of consumers said that they had already sought and taken advice from a financial adviser, specifically in relation to the Budget changes. In addition, while over a quarter,(27%) of respondents said they had already used an adviser for their financial decisions and expected to do so in the future, a further 30% said they now intend using an adviser to help them plan their retirement. So based on this evidence more consumers, who wouldn’t normally consider using an adviser, are likely to consider using one in the future. Interestingly, only 11% of those surveyed said they would probably or definitely rule out taking up the option of the Guidance interview.
In summary, if the introduction of the Guidance Guarantee results in better outcomes, including encouraging more consumers to seek advice that would be a great result but it may not be enough on its own. The gauntlet now needs to be thrown down to the adviser community because in this new world of ‘freedom and choice’ there are some terrific business opportunities for financial advisers. So between now and next April perhaps they should be considering how they can support the Guidance provider, whoever that might be, by making financial advice more accessible and affordable to a lot more people.
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