High-risk drawdown investments 'ticking time bomb' for advisers

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Advice firms are sitting on a “ticking time bomb” of complaints as drawdown clients are faced with high-risk investments, research has found. 

Analysis by financial technology provider EV, found three quarters of multi-asset funds used for drawdown are at the high end of the risk spectrum. 

The firm rated 170,000 funds for income risk and found more than half of these funds have retirement in their name.

This contrasts to data from EV’s income risk questionnaire, launched in 2018, which showed more than 85 per cent of retirees have a low to medium appetite for risk to their income.

Bruce Moss, EV’s founder, said: “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.

“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.”

Moss said in recent years clients have been protected from some investment risk with benign equity markets close to all time highs, but said a reversal in this could result in a loss of income for retirees. 

He added: “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.”

tara.o’connor@ft.com

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