Advice firms applying a capital growth mindset to clients in retirement are likely to be targeted by tougher regulation to improve their management of key later life financial risks.

A new report by the specialist research and consultancy practice, NextWealth, suggested that while the risk-profiling and risk-management processes used for clients in the accumulation phase of life are generally robust, many firms are leaning on these same processes when advising clients in the decumulation phase when they face different and more complex risks.

The NextWealth report revealed that most advisers use the same profiling tool and set of questions for clients in accumulation and decumulation and that 56% take a manual approach to managing risk around income generation – compared to about a third who use a tool.

“Advice ecosystems developed to manage risks to capital growth are not suitable at the point the primary risk becomes the sustainability of income,” commented retirement income director – retail at Just Group, Kavi Myladoor.

“This research by NextWealth suggests many retiring clients are shoehorned into the processes designed for savers rather than spenders.”

Myladoor also suggested that risk profiling is not picking up key differentiation between capital and income risk, and warned that advisers need to fill in the gaps manually, which creates a greater chance of “misunderstandings, preconceptions and bias” creeping in.

“Currently there is a high likelihood that two clients with similar resources and objectives could receive wildly different retirement recommendations, not only from different firms but from different advisers within the same firm,” Myladoor said.

“We should be prepared for the regulator to put more pressure on firms to ensure their approach to savers and spenders is appropriate. The industry needs to get behind minimum acceptable standards for retirement advice in key areas.”

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