A significant number of multi-asset funds have a low to medium income risk rating which is forcing investors into funds that don’t match their risk tolerance, EV has warned.

The financial technology provider suggested this is leaving advice firms on a “ticking time bomb” of potential complaints.

EV has rated 170,000 funds for income risk and put 76% of the funds used for drawdown clients at the high end of the risk spectrum. More than half of these funds have “retirement” in their name.

This fund analysis contrasts with data from EV’s income risk questionnaire, launched in 2018, which revealed that 85% of retirees have a low to medium appetite for risk to their income and suggests that investors in decumulation are unwittingly being exposed to higher-risk investments beyond their comfort zone.

“These findings are extremely concerning, providing strong evidence that significant numbers of clients using drawdown have been put into investment solutions which don’t match their risk tolerance,” said EV founder, Bruce Moss.

“Given the criticality of retirees’ income plans to their future wellbeing, and that an investment loss for most would be very difficult to recover from, this points to a potentially enormous problem for advice firms. Clients are unknowingly being exposed to more risk than they would feel comfortable with. Unless urgent action is taken, this will come back to bite advice firms.”

EV’s findings follow the recent thematic review of retirement income advice by the Financial Conduct Authority (FCA), which highlighted serious deficiencies around aligning investment solutions to the client’s risk profile and tolerance level

The regulator’s review of advice models and advice files found that for all 24 advice firms sampled, “the risk profiling approach showed no clear distinction between accumulation or decumulation”, even though the risks consumers face during these stages are fundamentally different.

According to the FCA report, seven in every 10 (70%) advice firms’ investment portfolios were not constructed to specifically meet the needs of customers in decumulation.

Moss added: “In recent years, clients have been insulated from some investment risk, with exceptionally benign equity markets around the world at, or close to, all-time highs. A potentially sharp reversal, which could come at any time, could create serious loss of income for many retirees and cause considerable hardship.

“This would inevitably lead to client complaints and, without evidence of robust risk suitability processes for income, any claims will be difficult to dispute. Many retirees and their advisers are sitting on a ticking time bomb and action must be taken to avoid causing foreseeable harm.”

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