Annual Reviews: the rules, a brief history and where to next?

For financial professionals only

At the recent Paraplanners Assembly Big Day Out (In), Patrick Ingram shared some views on making annual reviews in retirement planning a more engaging and more commercially astute aspect of the advisory proposition.

It’s an open question: who dreads Annual Reviews the most? Is it the administrator, the paraplanner, the adviser or even the client mystified by a wall of numbers? And when it comes to retirement planning, how useful is historical cost and performance data –water under the bridge – relative to the huge amount of work required to generate it?

The rules

Some of the current rules around the performance of annual reviews are set out in Chapter 9 of the FCA’s Conduct of Business Source Book. In a nutshell, advisers providing ongoing investment advice or portfolio management are charged with keeping up-to-date information on their clients’ situation and, armed with that information, reassessing the suitability of their original advice. Any changes in facts or advice need to be confirmed in writing. These reviews must be at least annual, or more frequently, depending on a client’s risk profile or the nature of the investments recommended. These rules are quite broad and not prescriptive – because the regulator aims to ensure that professional judgement is exercised in managing the client’s affairs. What that means in practice can vary a great deal.

A brief history

There has always been a spectrum of approaches to reviews. Before RDR – and before platforms – an adviser might write you a letter from time to time, suggesting you switch a fund or two, because they’d found something they thought would do better. And they would send their regards and ask after your family. For many that was the perfect service. No pressure – and you could sort things out on a phone call. At the other end of the spectrum there were GAD (Government Actuary Department) rate reviews for drawdown, which have been largely consigned to history by Pensions Freedom. But, despite their inflexibility, GAD reviews had their merits. They were firmly anchored in actuarial analysis, making them formulaic and very easy to administer. They weren’t so frequent that they put a high cost loading on portfolios. GAD rates responded to changes in the investment climate, linking maximum withdrawals to the risk-free rate. They were not prescriptive about investment strategy and they took a clear stance on the usefulness of annuitisation, within a tax subsidised environment, to people in their later life.

Where can these historical precedents lead us in imagining a more engaging process of regular communication with a retired client? It strikes me that there is an argument for spacing out the elements so often pulled very tightly together in the Annual Review. This will allow customers thinking room to see the value in the service that is supporting them more clearly. Regulation is signposting a need for relentless focus on the soft facts. The relaxed and conversational Family Update meeting is the obvious starting point. What has happened over the last year, and where are people’s thoughts tending now? If things are changing, the advice will change and with that products and portfolios too. So, hold off on the figure work.

Where to next?

Next, looking back to GAD, we could consider the idea of an Actuarial Review, in the office, of the hard facts. Given the client’s age, longevity expectations and the current investment climate, is the likelihood of plan success consistent with their preference for certainty, their financial capability, capacity for loss and spending plans, as newly re-recorded? Parmenion’s IMT can support this bench test. It is important from the firm’s perspective, of course, that this is a coherent exercise because conduct risk and business value are contingent on its success. But few clients want the detail of probabilities. They just want an opinion on whether they are safe – or safe enough.

So, where to put reviewing the investment strategy and the cost and charges reporting? I’d say in third place, in due course. And only set to work when it is clear that either no change or a very real change is the outcome of a review of the soft facts in person with the client, and of the hard facts from the file, in the context of where markets say they are heading.

This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.  

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