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Investing for income – Compliantly

  • By Liam Brennan

How does compliance impact financial planners’ decisions when helping clients to achieve their income goals? Compliance consultant Tony Catt takes a look at some of the main issues involved


Traditionally, there are two main directional choices when it comes to creating an investment strategy for a client – these are investing for growth or for income, although a combination of both can often be the goal. Which of these is most appropriate for a particular client is dependent on many factors. The answer can be ascertained by basic fact finding and will include getting the following information:

  • Client objectives
  • Age
  • Marital status – age of partner, if applicable
  • Age of dependents, if applicable
  • Working status
  • Anticipated retirement age
  • How much is being invested?
  • How long is the investment expected to be in place?
  • Overall wealth, including all assets and liabilities
  • Current income and expenditure
  • Anticipated income and expenditure at certain life stages
  • Attitude to investment risk – willingness to take risk, need to take risk and capacity for loss

As ever, this list is not exclusive as other personal factors may be revealed by a good fact finder. This list appears to contain basic fact finding information that most advisers will reckon that they do as a matter of course. However, at a recent FCA Live & Local Event on DB transfers, the FCA had found many fact finds to be insufficiently detailed for professional advisers to be able to provide accurate advice.

Meeting clients’ objectives

The point most commonly missed covers the client objectives:

  • What are the drivers for the investment?
  • What are the client’s priorities?
  • What do the clients actually want/need? The want or need
    may be two different things
  • What would be the consequences of the client’s objectives
    not being met?
  • Can the objectives be met by the actions being taken?
  • Does anything else need to be done to achieve
    the objectives?

Detailing client expenditure

The other most common issue is the lack of detail about client expenditure. Some advisers find this quite difficult as it may considered to be patronising or insulting to go into great detail, particularly relating to discretionary spending. It is a difficult balance between being thorough and being intrusive.

Getting detail of a client’s expenditure is at the heart of the fact finding and advice process.

But getting detail of a client’s expenditure is at the heart of the fact finding and advice process. It needs to be carefully considered both on a current basis and also looking at anticipated expenditure:

  • whilst working
  • until the mortgage is cleared
  • after clearing other debt
  • until dependants become financially independent
  • in relation to capital expenditure goals
  • in retirement
  • related to possible long-term care needs in the future

As advisers and paraplanners will know, there are many interesting software programs available on the market today which help advisers to provide projections of clients’ income and expenditure. I have experience of Voyant and CashCalc in this respect although others are available too. These both provide quite detailed reporting and deliver nice looking graphics. Of course, whether these are properly understood by the client is dependent on the skills and familiarity of the adviser in using the systems and their ability in interpreting the information and graphs which they provide.

If this information has not been gathered at all, it is very difficult to ascertain how much income will be needed at any given stage for the client. This leads us to a key question. Without knowing how much income is needed, what is the advice going to be?

The dating game

On the subject of fact finding, another issue connected with this is the dating of documents and meeting notes. The dating of documents provides context. This is particularly important when considering valuations of investments or whether a breakdown of expenditure is before or after some event has happened – for example after retirement. Let’s consider an example here from the world of football (apologies if you’re not interested in football!): which of these tables below accurately shows the position of the Football Premier League?

Actually, they all do. Table 1 is from 2016/7, Table 2 shows 2015/6, Table 3 shows the current position 2018/9 Table 4 shows 2018/7. But in isolation their meaning is diluted or even totally inaccurate, if the information needs to be up to date now.

Making recommendations

Following the effective completion of a detailed fact find, the gathered information then enables the adviser to move to the solution stage. The solution stage will probably involve product choices such as:

  • Pensions
  • Annuity
  • Individual Savings Accounts
  • Investment bonds
  • Mutual funds
  • Structured products
  • Bank deposits

It may well be that a client’s investment portfolio will be split between some – or even all – of these products. The combination will depend on a number of considerations, some of which I’ll outline here.

If considering pension, investment bonds, ISAs or mutual funds, then the ultimate choice of funds within the wrapper will be governed by the client’s objectives and attitude to risk. The attitude to risk consideration is also prevalent in the choice of annuity and/or bank deposits.
Tax is also a consideration. Investment bonds have traditionally been used for their ability to provide a tax-deferred income of up to 5% per year. Mutual funds offer the opportunity of using annual capital gains tax allowances. ISAs give tax-free withdrawals and income.

Structured products can provide income whilst retaining the capital value of the investment, depending, of course, on how the underlying investment has been set up.
Bank deposits pay interest without subjecting the underlying capital to fluctuations from market risk – although there is the risk of depreciation of capital – especially over the longer term – due to the effects of inflation. Currently, savings accounts are not generating high levels of interest, with rates paid tending to be much lower than the rate of inflation. Effectively, this means that the client experiences a negative real return on capital: the money in the client’s account has less buying power further down the line than it did at the outset.

Of course, annuities provide some certainty as they pay a definite level of income, either for a certain period or for life. However, annuity rates are lower now than they have been historically. These are a bet on client mortality and the capital can be lost when the client dies.

This pursuit of income also relates to pension transfers. For many years, the main choice for those with a personal pension fund at retirement was to buy an annuity. For some people, there was the option of income drawdown to provide cash withdrawals from the account up to certain levels. However, since Pension Freedoms were announced in 2014, it is now possible to use an income drawdown approach without the previous limits and to be quite flexible about when and how much income is taken at any time. Of course, tax is a primary consideration in how this is done. Looking ahead though, the main issue that may come out in the future will be when people run out of money in retirement because they have used up their pension savings.

A ticking time bomb

I continue to be amazed at the number of people who transfer out of Defined Benefits schemes to buy into this income flexibility in retirement – particularly those who have been employed throughout their entire career. They will have been used to being paid around the 28th of the month for their whole life and are used to receiving that regular income. Why would clients suddenly want to move to a situation where the timing and amount of their income becomes irregular? If they direct their funds into capital expenditure or debt repayment, they run the risk of exhausting their funds quite quickly. This is a time bomb waiting to detonate in the not too distant future.

There is nothing that is quite so under-rated as a good fact find.

So, as ever, when it comes to good financial planning, we come back to the dark art of fact finding. There is nothing that is quite so under-rated as a good fact find. Preferably one with lots of dated, explanatory notes giving details of client objectives. No compliance consultant will ever complain of having too much information in this respect.


About Tony Catt

Formerly an adviser himself, Tony Catt is a freelance compliance consultant, undertaking a whole range of compliance duties for professional advisers. Contact Tony info@tonycatt.co.uk or call 07899 847338.

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