In this article I continue my look at the overall sales process for equity release advisers looking at key areas such as how to go about making the advice decision and the research that is needed to get to this point. You’ll note that I haven’t provided product-specific information as this will be up to individual advisers to keep on top of. Indeed, as product developments and changes can happen constantly it is vital that the equity release adviser spends a significant amount of time keeping abreast of product updates and literature.
So, how does an adviser go about deciding on the solution they will put to their clients? Suitability is key. To quote the FSA: ‘A firm must take reasonable steps to ensure that any personal recommendation to a customer to enter into a…equity release transaction is suitable for that customer.’ Only when an adviser is confident that equity release is appropriate for the client(s) at this point in time, and all other means of meeting the clients’ requirements have been fully explored, should the adviser begin the next phase of product research. This is particularly important where the client is wishing to raise a small additional income or cash sum as there may be other benefits or grants that can meet the need.
FSA guidance
In terms of measuring the suitability of the equity release product to the client we can again look at the FSA guidance on this. A product will be suitable if the firm has reasonable grounds to conclude that:
- The customer can afford to enter into it
- It is appropriate to the customer’s needs and circumstances
- It is the most suitable product within the scope of service provided. This means that, an adviser stating they offer advice from the whole of the market and are independent, has no excuse not to look at every product available in the equity release sector.
- The customer benefits outweigh any adverse effect on the customer’s entitlement to means-tested benefits and their tax position
The issue of benefit entitlement is vitally important to any assessment of the client’s suitability for equity release. It is estimated that well over 1 million of the UK’s elderly population are not claiming means-tested benefits for which they are entitled. The two main benefits which are means-tested and therefore could be affected by equity release are the Pension Credit and Council Tax Benefit. Although advisers are not expected to be experts in this area it is advisable they have a good working knowledge so as to sensibly advise the client. There are a number of different tools and aids that advisers can use to help in this regard including Equibis, Fintal and entitledto.com. Advisers should ensure they keep the subsequent reports on file to demonstrate their research in this area.
In the previous article I stated that the fact-find document was just a tool to help, it does not do the adviser’s job for them. Good fact-finding is reliant on good questioning and listening skills. The same principle applies to research and product choice. There are a number of tools to help but they all have their limitations. They can be a useful starting point but advisers should not forget the following points:
- Not all products may be listed on the research tool used.
- The lowest interest rate is not automatically the best product for the client.
- The information provided via research tools may not be comprehensive.
As with any advice arena the information and considerations can be complex and are dependent on both the client’s needs and often, crucially, their attitudes in a number of areas, for example, house price inflation, their attitude to debt, views on their own health and life expectancy, their thoughts and wishes regarding their longer-term needs, the possibility of moving house, their care provision and whether they wish to provide a legacy.
These areas should have been raised and discussed in a clear objective way as part of the fact-find process. Where conflicting solutions emerge it is vital the client’s views and requirements are prioritised in order to advise the most appropriate solution. As I’ve suggested in previous articles, it is the ‘soft fact’ information that the clients provide that steers the advice, not the hard facts
In many cases some product groups can quickly be discounted as totally unsuitable and this will obviously help to narrow down the products to choose from. A useful starting point is to consider the generic advantages and disadvantages of each product group. However, there are always exceptions to the rule as product providers develop better products which to some extent overcome some of the generic issues with the product type. It is important to stay up to date on product developments and always read the product literature before making a final decision.
CASE STUDY 1
Mr & Mrs Evans, Gerald and Hannah, aged 72 and 70 respectively are looking for advice. They feel they have enough income from their pensions, etc but do not have enough funds in savings or investments to fully meet the cost of a much-wanted new conservatory. They have discussed the idea of equity release within their family and have now approached the adviser to look at the options for releasing capital tied up in the value of their home worth £250,000.
Their initial need is to raise £25,000 to help cover the cost of the new conservatory and to clear a small mortgage still left on their home. They are very keen to avoid any sort of borrowing and feel that the recent increases in house prices are not sustainable in the long term and are worried house prices may fall in the short to medium term.
Both Mr & Mrs Evans feel that they could live to a good age as they both have one parent still living. They have two grown-up children and four grandchildren and although they wish to have a good retirement they feel strongly that they want to help their grandchildren get a foot on the housing ladder and so are very keen to leave something to each grandchild.
CASE STUDY 2
Mr & Mrs Henry, Ralph and Patricia, are also aged 72 and 70 respectively. They are also looking for advice on how to release equity from their home worth £250,000. They have discussed equity release with their only son James, a company director. James is not expecting an inheritance from his parents and would prefer his parents to live comfortably in retirement without money worries.
They want to release £25,000 to replace their car, install a new central heating system in their home and take a holiday.
They tell the adviser they feel they would be fortunate if they lived another five to 10 years based on fact that both Ralph and Patricia suffer from health problems. Their attitude to house price inflation is very positive and when asked to give a figure, they expect house price growth to continue over their lifetime.
Both the Home Reversion Plan and the Lifetime Mortgage products provide protection to ensure that the clients can continue to live in their homes until they die or move into long-term care. Gerald & Hannah want:
- Something with longevity - both clients suggest they will live a long time.
- They wish to avoid debt
- They have a conservative view of House Price Inflation
- Estate value on death or during their lifetimes if grandchildren reach appropriate ages
Ralph & Patricia want:
- Longevity – estimate five to 10 years
- No concerns about borrowing
- Positive attitude to House Price Inflation
- No family so no specific need to protect estate
Armed with the adviser’s recommendation(s) the client now has the opportunity to make an informed choice. If the process has been conducted properly to this point the clients will follow your recommendation. I will cover the way to present your advice and get the business in the next and final part of these ‘Back to Basics’ articles.
