There is much positivity around the equity release sector as we embark upon 2014 – certainly many stakeholders I have spoken to over the course of the last few months are anticipating a further improvement on last year’s product sales which, as many advisers will know, breached the £1 billion barrier again.
I recently saw some figures from the Equity Release Council which focused on lifetime mortgages and the changing nature of the products clients are taking out. Back in 2009 it was almost an even split between more traditional lump-sum products and the relatively new drawdown opportunity – now that has changed significantly with drawdown representing nearly two-thirds of plans sold.
Drawdown, certainly at the moment, appears to be king however judging by some of the adviser comments at our recent round table event in Gloucester there is a growing concern about client’s use of drawdown and the potential repercussions for both them and their advisers.
The issue appears to revolve around the post-advice behaviour of clients who take out a drawdown plan. Clearly, all specialist advisers will be recommending drawdown for specific reasons and will have all the necessary paperwork and ‘reasons why’ to justify their recommendation. The problem as one adviser pointed out with drawdown is that the adviser “can get it so right on day one and it can go so wrong on day two”.
The reason is that with drawdown the client effectively gets a cash fund from which they draw the money from. No problem here and the adviser will be fully aware of the initial sum that is to be drawn down, however they may not be made aware (by the provider or the client) of future monies that are taken. Effectively, on day two the client could draw down the full amount, say £80k from the provider, and the adviser will be none the wiser.
So, why is this a problem? After all, the client has been provided with the total amount they can potential draw down. It must be fine for them to take the full amount, right? Wrong. It’s an issue for a number of reasons. The adviser has firstly advised on the first drawdown amount and subsequent draw downs, particularly if they are for significant amounts, could have a significant impact on areas like the client’s access to benefits, for example. Secondly, providers do not require that the client recontacts their adviser when they make further draw downs which again could mean that they are placing themselves at a disadvantage.
As one adviser pointed out there is a real difference with taking what you need and taking what you can. The argument is that if a client has access to, for example, £80k then there is a temptation to take out the full amount simply because it’s available. This is not the circumstances that an adviser initially advised on and, as indicated above, it could place the client at a serious disadvantage through no fault of the adviser.
So, what is the solution to such a problem? As so often it comes down to constant client contact. Nothing can be done to force the client to recontact the adviser however all documentation and any communication should be pointing them in that direction. For example, in the suitability report advisers should be making sure they suggest the client gets back in contact if they think they’re going to draw down any further monies. In effect, this is a good marketing tool as it allows the adviser to have regular ongoing contact and means they can keep up to date with their circumstances and conduct a further factfind based on their changing wants and needs. It also means the adviser is covering all eventualities at every step of the way and means there is less likelihood that the original advice will be deemed unsuitable.
This is one example of how a changing marketplace can affect the very nature of the advice that’s provided. Advisers are only too well aware that by being out of the loop when it comes to further drawdowns they (and the client) are potentially being placed in a very difficult position. Ensuring the client speaks to the adviser before taking action is the only way to ensure they do not follow through with a decision that could be bad news for all parties.
Chris Prior is manager, sales and distribution, at Bridgewater Equity Release