Identifying a client's history of financial ill-discipline - impact on DB transfer cases

Wildcherry

**Background **
The firm I work for has a rigorous procedure and vetting process to determine whether a client should go through the initial process of advice for a DB case. If the answer is yes, then we have another rigorous process to determine whether a DB transfer is or isn't suitable for that particular client (and rightly so).

In the process, the client is explained, and made to explain back to us, the risks involved in a DB transfer process. One risk is that of ill-discipline and how with flexi-access, overspending lavishly and irratically with poor discipline can potentially put the "run out age" estimate (as indicated in a TVAS report) at risk and the likelihood of the money running out before mortality increasing as a result. The risk then is, if a client is at risk of poor discipline, should this be a reason not to transfer?

Question
My questions to others here is, apart from a risk questionnaire (which would identify a potential high risk tolerance, but this doesn't necessarily indicate poor discipline), how can/do you identify evidence of a client's past financial discipline and how do you then gain an idea of what their future discipline could be like?

How do you document this (i.e. hard/soft facts/questions in the fact find? addendums?)
What questions do you ask?
What weight do you then put on these answers towards the recommendation?
Does significant evidence of ill-discipline give you ground not to recommend a DB transfer?

arongunningham

I would say that, unless it become obvious through factfinding, there aren't any specific questions in the process to help us determine if the client has a history of poor discipline with their finances.

However, if they did, it would probably become clear (lack of assets despite high income, for example).

Good question!

And yes, significant evidence of ill-discipline could give you grounds not to recommend a transfer. However, I have seen no guidance/discussions of that being a reason not to transfer in isolation.

richallum

I think this is what APTA is designed to cover. We've had cases where it's clear a client dies not have discipline or experience to stick to the plan based on FAD. It's a tricky one to base a recommendation on though.

Suse1969

Oh good question.

Nothing specific but like the above we try and drill down as much as possible into what they've done before. Most of our DB work is introduced by professional connections so we also have their input as they've worked with them for much longer (we're part of a CA firm).

No ongoing servicing would be a big factor in whether we took the client on too if we felt that their discipline wasn't indicative of sticking to a plan.

This would be at the discussion point of whether to take the client on though rather than basing a recommendation on it.

benjaminfabi

Cobs 19.1.6G

(3) A firm should only consider a transfer, conversion or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer, conversion or opt-out is in the retail client’s best interests.

(4) To demonstrate (3), the factors a firm should take into account include:

(b) the retail client’s attitude to, and understanding of the risk of giving up safeguarded benefits (or potential safeguarded benefits) for flexible benefits, taking into account the following factors:
...
(iv) whether the retail client would be likely to access funds in an arrangement with flexible benefits in an unplanned way;
(v) the likely impact of (iv) on the sustainability of the funds over time;
(vi) the retail client’s attitude to and experience of managing investments or paying for advice on investments so long as the funds last;

I think you are spot on to be considering this as a potential reason not to recommend a transfer. With iv and v above, you can consider the use of withdrawal policies, perhaps showing the client what happens if they decided to overspend by x% pa for the first 10 years and specifically getting them to sign to say that they understand doing this means they'll run out of money. But it can get complex and it must be supported by cashflow in my opinion.

I think you can look for the warning signs too, especially for clients who have significant DB assets and nothing else to fall back on – asset poor pension rich then why is this? Questions I'd ask include:

What is the highest amount of cash they've ever had saved in a savings account and what did it eventually get spent on? (not including any windfall, but if they've had a windfall what did they do with it?)
Do they have high debt (particularly i/o mortgage) close to retirement? How are they planning to repay that mortgage and does the PCLS from the DB scheme cover it without the need to transfer?
What was the last thing they borrowed money to buy? Why didn't they save for it or forgo it?
If they are a high earner, why haven't they got any other assets?
Do they have high luxury expenditure?
Is this transfer enabling them to retire early? If so, does a one year delay make a meaningful difference?
What options does the client have for ongoing employment income?

I agree with @richallum it's tricky to use this as the basis for the recommendation. But I also think you can do a lot of this during the first stage of your process.

Colinstewart76

Hi all - good discussion. I worked on a case recently where there was concern about 'unplanned' withdrawals and financial indiscipline. Rory's attitude to transfer risk q explores a little, and ultimately it's something that has to be captured at fact find stage I think. It's certainly a valid reason to not recommending a transfer but it's naturally hard to model something that's unplanned.

A compliance department (one of the better ones imo) reviewed one of the cases we worked on and insisted on a prominent risk warning in the SR (where the advice was to transfer) that 'if there is a possibility that you are likely to take unplanned withdrawals or that you are not prepared to commit to regular reviews indefinitely, then flexible benefits may not be suitable for you'. It's arse covering, granted, but I think it's a good point.

There's only so much you can do and, frankly, if the client tells you one thing but does another, provided you've highlighted the risks, I'm not sure you can do a lot more other than cover your backside.

Suse1969

ha ha - we met with a client to discuss their DB report a few years back and he had notated it with CYA in various sections. Adviser had to ask what it meant - exactly as you say Colin :-)