Working with independent financial advisers

In providing a rounded service to their clients, there are a number of areas in which the elderly client adviser should work closely with an independent financial adviser (IFA). In particular, the following aspects require specialist advice:

Investment advice for those acting as an attorney or deputy;
Care fees planning; and,
Equity release.

Each of these topics could easily command an article of their own, but the following notes should adequately set the scene for the purposes of this article.

Investment advice for those acting as an attorney or deputy

When acting for such clients, the elderly client adviser is in a fiduciary capacity and should apply the principles of the Trustee Act 2000 to any investment decision.

The following areas in particular should be reviewed on a regular basis:

Risk profile – does the ‘shape’ (asset allocation) of the portfolio still reflect the requirements of the client? Have some investments performed better than others and consequently skewed the original asset allocation? Will funds be required from the portfolio in the foreseeable future, which might indicate that a lower risk profile should be adopted?
Tax treatment – is the most effective use being made of the various tax allowances available? Has consideration been given to employing ‘tax-wrappers’ (such as an ISA) to limit the immediate impact of tax on investment returns?
Investment style – is the style of investment (for example, direct equities as opposed to collectives) really suitable? Is there sufficient diversification across the almost countless asset classes available to the modern portfolio manger?
Costs of investment management – what are the true costs of the existing investment management service being employed? Can the same or better results be achieved at a lower cost?
Ease and cost of administration – is the current method of investment incurring an additional administrative burden (for example, more involved annual tax returns), the cost of which can adversely impact upon overall investment returns?

While an IFA is best placed to provide such advice, it should be noted that it is not essential for an IFA to have any formal investment qualification to be authorised and regulated by the Financial Services Authority (FSA).

Care fees planning

When a client enters a care home or nursing home on a self-funded basis, there are two choices in terms of making the most effective use of the financial resources available to meet the accommodation and personal care costs. Any shortfall of income over expenditure can be made up simply by investing any available capital and drawing down on the fund. There is often a dilemma with this approach in so far as the capital may be exhausted before the client dies, exposing them to the risk of having to accept an inferior standard of accommodation.

As an alternative, consideration should be given to taking out an immediate needs plan (INP), which is a form of impaired life annuity. As with all annuities, an immediate needs plan provides a guaranteed income for life in exchange for a lump sum. The annuity is underwritten to take into account not only the client’s age, but also their life-expectancy. The client, their family and their advisers can then assess whether the peace of mind afforded by a guaranteed income for life is worth the loss of capital.

In the following example, the client is female, aged 90 and has £300,000 available for investment following the sale of her home. The shortfall of income over expenditure is £31,808 per annum, which is assumed to increase five per cent per annum. Assuming an investment return of four per cent per annum after tax and charges, the table compares the possible residual fund, first without purchase of an immediate needs plan and second, after the purchase of an immediate needs plan costing £172,500. As will be seen, if the client survives to age 95, her beneficiaries could well be better off had an immediate needs plan been purchased (see Table one).

In this case, the INP provides an initial income of £31,808 per annum, increasing at five per cent per annum. With this income being paid directly to the care provider, it is tax-exempt from the client’s perspective; a very attractive near 18.5 per cent per annum return on the capital employed.

It should be noted that only IFAs who hold the Chartered Insurance Institute’s Long Term Care Insurance qualification (CF8) are able to advise on INPs.

Equity release

While equity release should always be the last resort for solving a client’s financial problem, it is increasingly likely clients will outlive their capital and/or pensions and will need to access the equity in their home.

There are currently two methods of achieving equity release on the UK market as follows:

Lifetime mortgage – as the name suggests, this is a mortgage secured upon the client’s property and generally has the interest rolled-up into the mortgage so there is no payment until the property is sold. The loan-to-value limits do increase with age, but are relatively modest as the mortgagor will insist on plenty of headroom for the no negative equity guarantee. The released capital can be drawn as a single lump some or taken in stages up to the agreed limit as and when required; or,
Home reversion – with a home reversion plan, the client sells the property either fully or partially to the provider in exchange for a capital lump sum and a tenancy for life. The amount of the capital released is based both upon the proportion of the property sold and the discount required by the provider to reflect the client’s life-expectancy.

It should be noted that only IFAs who hold a mortgage and equity release qualification, such as those provided by the Chartered Insurance Institute – Certificate in Mortgage Advice (CF6) and Equity Release (ER1) – can advise in this area.

In June 2006, the FSA published a consultative document entitled ‘The Retail Distribution Review’, in their words: “To address the many persistent problems we had observed in the retail investment market.” After an extensive consultation process, we are now in the implementation phase and the new face of retail financial services will be with us on 1 January 2013.

What were the key ‘persistent problems’ and how are they being addressed? The FSA focused on the many, so-called, mis-selling scandals that have hit the industry in recent years – pension transfers, endowment mortgages, split capital investment trusts to name but three – and sought common factors. Unsurprisingly, it emerged that there were two common factors to all of these: too low an entry qualification standard for advisers and too high commission incentives for certain products sales.

So, what are the solutions? With effect from the implementation date, all financial advisers, whether they work on a restricted (tied to one or more product providers) or on a whole of market basis, will need to have achieved a higher minimum qualification standard to continue to advise. At the same time, all regulated investment product providers will be barred from paying commission to intermediaries. This only encompasses investment and pension business, as the FSA has decided not to apply the same principles to mortgage advice and it is unlikely to be extended to the protection market.

It will still be possible for an adviser to take a fee from the product recommended, but the level of that remuneration will be agreed exclusively between the adviser and the client, not dictated by the provider. This facility is essential as, for example, with tax-privileged pensions, there are tax advantages to the client if the adviser’s fee is taken from the product rather than from his bank account, the contents of which have been taxed.

On the basis that the FSA considered the problem extensive enough to go to all this effort, there are clearly a lot of under-qualified advisers in the marketplace, who are heavily reliant on initial commission from product sales. In particular, I am aware that a substantial number of advisers will leave the industry over the course of the next three years or so. Many IFAs are in their 50s and 60s and are disinclined to acquire additional qualifications at this relatively late stage in their career. At the risk of an accusation of being cynical, I wonder whether some of those are planning on maximising their commission income over the remaining years! There is, however, a new breed of adviser already available with at least the requisite qualifications and an ethical approach to remuneration. To which of these advisers are you introducing your clients?

When I talk to elderly client advisers about the IFAs with whom they deal, there is often little or no due diligence undertaken. Relationships have been established following chance meetings at golf clubs, tennis clubs or business breakfast meetings. Also IFAs who have worked with one client are often approached to help with another client matter. I am always conscious that, when working with a client upon the recommendation of a fellow professional, I become an extension of their service. As such, if something goes wrong the client’s grievance will be as much against the introducer as it will be against the IFA.

Particularly in the current regulatory climate, I believe it is best practice for elderly client advisers to undertake some due diligence before referring their valued client to an IFA.

While the following list of questions are not exhaustive, they will give you a good idea of what your client is going to get for their money:

Do you have experience in providing advice on [your client’s area(s) of interest]?
What are your areas of specialism?
What qualifications do you have in these fields?
How long have you been providing financial planning advice?
How long do you expect to continue in your present role?
Would you give me a brief history of your career to date?
What relevant continuing professional development do you undertake?
What financial services can you offer?
Can you please describe your approach to financial planning.
How many clients do you currently look after?
Will my client only deal with you now and in the future or will someone else be involved? If so, whom and in what capacity?
How will my client pay you for your services? Will they pay a fee, will you receive a commission or will it be a combination of these?
What do you typically charge for and how much is a normal fee?
Do you have any affiliation with any company whose products or services you may recommend?
Is any of your personal income based upon selling products or services?
Do other professionals with whom you are associated send you business, pay you fees or commissions or provide any other benefits?
Will you confirm all of your advice in writing before asking my client to commit to any given course of action or charge any fees?

A professional financial adviser should not be offended if you asked any of these questions.

Clive Barwell is a certified financial planner with Towergate Financial (North). He can be contacted at clive.barwell@towergate.co.uk

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