Mandatory equity release advice is not there to patronise but rather assist every customer, writes Andrea Rozario
John Steinbeck quipped in one of his final works that, ‘no one wants advice - only corroboration'.
This quote may seem especially pertinent to advisers working in the equity release industry.
Many of the clients we serve (but certainly not all!) have thoroughly researched our market, understand the complexities of the different products and feel that they could proceed without professional advice.
Upon hearing that advice is mandatory in the equity release industry some clients respond with emotions ranging from incredulity, frustration to outright anger.
So, for those customers who believe they truly do have considerable knowledge and understanding of equity release is advice really essential?
Unfortunately for those customers who do believe that they are clued up enough to proceed without advice, the reality can often be very different.
The transition from working age to retirement is certainly one of the biggest financial changes in our lives, and retirees nationwide are bombarded with literature and information about products that claim to be able to strengthen their retirement finances.
Much of this information, especially in the equity release arena, is often drawn out and padded to such an extent by regulatory requirements that the knowledge we are trying to convey to customers is often lost.
To have an adviser sit opposite you and explain the nuances of equity release, answer any question you may have, put you at ease and walk you through every step is an invaluable asset to the industry and, indeed, the customer.
Mandatory advice is not there to patronise but rather assist every customer in reaching a level of understanding where they are comfortable; a level of understanding that can help them decide whether to proceed or try alternative routes.
The role of the adviser is, as the name suggests, to advise. Every customer is different and equity release advisers adapt their advice to each individual customer. Without this skill being available to every customer, the results could be negative in the extreme.
Another key reason why advice is essential in the equity release market comes down to the complexity of the products available; complexities that are in part due to the increasing flexibility and choices available.
Now, some may argue that equity release is not overly complex, and I would tend to agree, but there are certain elements of equity release that can confuse customers.
For example, the way early redemption charges are calculated can be rather complex and a proper understanding of how these are calculated is essential to those customers who may not plan to hold their policy for as long as they are designed for.
Plus, the impact of ‘rolled-up', compound interest is the factor that can often cause the most confusion and yet is certainly one of the most important aspects that equity release customers must fully grasp.
What's the difference?
The difference between compounded interest and simple interest is vast and advisers must ensure their customers understand the difference or they may be in for a shock when they check how much they owe.
A £50,000 lifetime mortgage taken under simple interest at 6% would result in £110,000 being paid back over a period of 20 years; however, the same loan calculated with compounded interest results in a total repayment of £160,000 after the same 20 year period.
Therefore, it is of fundamental importance that advisers remain available to customers to explain the difference between these two types of interest and to be able to convey their immense knowledge in an easily digestible way.
Without our professional advisers, good customer outcomes could not be assured.
Of course the benefit of compound interest is no monthly payments have to be paid thereby not impacting on the customer's monthly disposable income.
The prevalence of myths is one other reason why I believe professional advice must remain mandatory.
Surveys have shown that the majority of customers believe that they do have a strong understanding of equity release, but in reality their understanding is, on average, flawed.
Aviva conducted one such study in 2014 that found that although ‘82% of over-55s feel they have a strong overall understanding of equity release', over a quarter of those surveyed believed equity release "involves selling their home and becoming a tenant in it until they die".
There is, therefore, a large minority of potential customers who see equity release as limited to the home reversion, which, as we know, makes up a tiny proportion of modern equity release plans - around 1%.
So, despite customers believing that they understand equity release and its uses, there is a significant amount of people who are stuck in the past and really have no understanding of the uses of modern equity release, or in fact the safeguards.
The vast changes in the equity release industry over the past decade or so are being overlooked by customers who simply haven't been made aware of the evolution of this marketplace, and it is only with the help of professional advisers that potential customers can receive the fair, balanced and extensive understanding they deserve.
However, the adviser's skill and knowledge here is essential.
They must have a thorough and deep understanding of not only the various products but other issues such as impact on the estate, other options, impact on state benefits and future needs the customer may have, all of which underpins the very necessary need for specialist expert advice for the customer.
Andrea Rozario is chief corporate officer at Bower Retirement Services
To communicate equity release's wider opportunities and benefits, writes Chris Flowers, providers and advisers need to think about how best to engage not only its usual target audience but also their families
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