In our first survey in collaboration with Incisive Research, Retirement Planner takes a look at the equity release market and canvasses adviser opinion on this much misunderstood product. While the industry has worked hard to improve standards, equity release has been tainted by the reputation of an earlier generation of products. As a result many consumers and advisers remain wary. As well as asking advisers why they recommend equity release it was also important to ask others why they choose not to. The fact that in the past the industry has been split between lifetime mortgages, which are regulated by the FSA and home reversions which weren't, further complicated the matter. However, from April this year home reversions are regulated by the FSA. We asked the respondents how they think this will change how home reversions are viewed and whether it will affect the wider equity release market.
It's fair to say that equity release has been viewed with some trepidation in the past. Stories of people plunging into debt after taking out equity release plans are widespread in the media while several mystery shopping exercises have highlighted a lack of quality advice and robust business practices in the sector. However, there is also plenty of evidence to suggest that the equity release industry has listened to its detractors and has set about doing something about it. Industry body Safe Home Income Plans (SHIP) was set up in 1991 with the aim of raising product standards and protecting customers. Lifetime mortgages were regulated in 1995 while home reversions followed in April of this year.
"Home reversions currently only make up a small percentage of the market but regulation will bring extra confidence for customers," says Michael Philps, business manager at Hinton & Wild. "Some people are now calling it a level playing field and advisers can more easily compare and contrast products. I don't think we will see any huge explosion in the home reversion market but its current 5% market share should certainly grow."
Growth in the home reversion market
The fully regulated status of the industry seems to have had an effect on the adviser community. Of those questioned, 18% thought home reversion regulation would lead to a large increase in their business with a further 54% stating that they thought it would increase to a small extent (see pie chart 1). As a result, 61% of IFAs thought it very likely that equity release specialists within their firm would take up the exams enabling them to advise on home reversions while a further 24% thought it would be likely. When asked why they had not recommended home reversions in the past around 51% thought it had been seen as an unappealing plan and 18% admitted to having been put off by the product's unregulated status. (See box 1 for other reasons). A lack of flexibility and clarity in home reversion products was also put forward and is vital if the home reversion market is to grow.
However, according to Philps emphasis also needs to be placed on adviser training and understanding of the products they recommend.
"I liken it to a swan gliding across a lake," he says. "You have a straightforward easy to understand product on the surface which works very hard beneath it. Providers have worked hard to develop their products in recent years but we need to ensure clients understand them. This means there is a huge training issue for the IFA as while customers need to get the best quality advice, they can only do this if the IFA fully understands what they are recommending."
Deciding between products
Understanding the key factors determining whether lifetime mortgages or reversions are recommended is all important. While home reversion's previous unregulated status may be one reason there were also several other reasons put forward as to why the home reversion market share is so small. Of those questioned 75% said that understanding of the product was the all important factor in deciding which product to recommend. The age of the client was highlighted as an important factor by 62% of respondees with attitude to risk being highlighted in a further 50% of answers. Other factors highlighted included:
- If they have a real need for available money and no other means of getting it.
- Are they happy becoming tenants?
- Attitude to being in debt during retirement
- What are the client's future plans?
Suitability of alternatives
- Have all other alternatives been examined
- Are family concerned about client selling house
- Family agreement
- Desire to leave an inheritance
The wider market
While an increasing number of advisers are looking to recommend equity release changes still need to be made to the market. Of those questioned 62% said they thought changes needed to be made and only 24% disagreed. Of the changes to be made within the wider equity release market increased flexibility and clarity were popular though issues such as easier drawdown of funds, lower long term fixed rates of interest and increased value for money were also popular (See box 2 for changes).
However, according to Dean Mirfin, business development director at Key Retirement Solutions, a great deal of flexibility already exists within the equity release market and increased complexity is a sign of this.
"My first observation would be what sort of flexibility are advisers looking for?" he says. "Equity release plans today are already extremely flexible but this increased flexibility leads to increased complexity. Striking a balance between the two is one of the main challenges the equity release market currently faces. I think there is room for flexibility in home reversion plans and when this happens I think it will improve their market penetration. The fact they are now regulated will increase this penetration but the real challenge will be to increase the flexibility and competitiveness of these products."
What about those who are not recommending equity release?
However, while advisers are showing a growing interest in the equity release market there remains a substantial number who choose not to write equity release business. Of those asked 24% said they believed they did not have enough understanding of the product to recommend it. Meanwhile 14% believed customers continue to have a poor perception of the product while a further 2% believed equity release plans to be overly complex (See box 4 for other reasons why advisers choose not to recommend equity release). It would also seem that providers have a long way to go to win these advisers round because even after regulation and increased product innovation only 17% of those questioned said they would consider recommending equity release products in the next six months with a further 10% saying they would consider doing it in the next year. Of those remaining 48% of advisers said they were unsure as to whether they would look to recommend equity release while a determined 25% said they never would (see pie chart 3).
Role of SHIP
Industry body SHIP will undeniably have a huge role to play in convincing advisers to enter the equity release market. Of those advisers who answered the survey, 77% of them said that they would not recommend a product that had not been endorsed by SHIP - a ringing recommendation in the face of those who believe a regulated industry would affect SHIP's future role.
"Fundamentally SHIP's focus is on ensuring that equity release plans are safe and that the consumer has a clear understanding of the products available," says Mirfin. "These are not factors managed by the regulator. It's easy for a provider to launch a product and say it's as good as any SHIP product but at the end of the day SHIP has a very strict product approval regime. No-one else does what SHIP does in ensuring standards and processes are suitably robust."
Mirfin believes that in order to widen the appeal of the product SHIP needs to continue to act as a negotiating voice and help the industry move forward with the help of other organisations.
"SHIP needs to continue bridging the gap between the industry, regulator and trade bodies," he says. "Strengthening these relationships is vital in ensuring no-one works in isolation. This approach helps with the cross pollination of ideas and development of the industry."
By continuing this kind of dialogue it is to be hoped that the perception of equity release can be changed and more advisers can be encouraged to enter the market. From this point of view the influence of SHIP appears stronger even than that of the FSA. When advisers were asked whether the FSA's belief that equity relief is a high risk area had affected their decision to enter the market only 11% said it had encouraged their decision to a large extent while 63% said it had not affected their decision at all (see pie chart 2 and box 3 for full responses).
Levels of service
The level of service advisers receive from providers is also all important but received mixed results from those questioned. While 77 out of 142 advisers questioned believe the administration service provided was good a further 42 ranked it as neither good or bad. The good news is that only six of those questioned said administration was bad and no advisers said it was appalling. Similarly fund performance received a varied response. While three out of 101 respondees said they rated fund performance as excellent, 12 said it was good, 73 described it as neither good or bad, 11 said it was bad and two said it was appalling. Other categories of service included charges, customer service and training (See table 1 for full details). The consensus being that while the results are not particularly bad, they are not particularly good either and providers will need to work hard to develop their service offering if they are to improve adviser satisfaction.
Reasons for doing equity release
The increasing value of people's homes means that equity release is an interesting option for those looking to release capital from their largest asset. The reasons for doing so are numerous with the need for a better standard of living being the main factor. Other reasons include home repairs and debt repayment.
"On a day to day basis people may be happy with the income they receive but it may not be enough for them to take the holidays that they want for instance," says Mirfin. "Equity release is a good way of doing this. Also with home improvements a lot of the work people do is not necessarily essential, it could for instance be building an extension or conservatory, it's all about improving their lifestyle."
Other common uses for equity release include repaying debts and helping out children as according to Philps "parents are increasingly riding to the rescue when it comes to helping children get on the property ladder or even helping out with university fees for grandchildren."
However, another interesting use for equity release is inheritance tax planning though Philps believes it should rarely be anyone's primary reason for using the product (see box 5 for full list of uses).
"To be honest inheritance tax planning should be a by-product of using equity release, not the main reason" says Philps. "When we talk to people the starting point should always be to ask what their specific need is. We would never tell someone to take money from their home for a rainy day for instance. There are so many ways of mitigating inheritance tax and these options should be looked at first. If it is to be used then I would recommend it is used as part of a portfolio of options. The adviser's role is to offer the best advice and to do this they need to prove that the customer would be better off using equity release. If this cannot be demonstrated then it shouldn't be used in that instance."
Depending on what the clients need the money for the method of taking cash once it's been raised is of great importance and has been one of the main areas where flexibility has been developed. The majority of people (54%) choose to take their money as a lump sum - perfect for funding a house extension for instance or planning a dream holiday. However, this is not the only way of taking the money raised. Of those questioned 40% of advisers said that their clients take the money as and when needed in a variable drawdown arrangement. The remaining 6% of advisers said that their clients take the money raised in the form of income.
How do advisers generate their equity release business?
While much emphasis is placed upon how advisers deal with clients with regards to quality of advice etc not much focus is placed upon how advisers get their business in the first place. Perhaps not surprisingly a massive 86% of respondees get their business from direct referrals whether that be through fellow advisers, solicitors etc. Existing client banks also provide a fruitful source of new business for around 53% of those questioned. Marketing initiatives also seem to be playing their part in getting the general public to consider using equity release as 18% of advisers have found. Many advisers are receiving queries from people using the internet to find out more about equity release and people are still searching sites such as Yell.co.uk to explore their options.
While equity release has so far enjoyed a chequered history there are real signs that the industry is moving forward. Rising property values means that people are increasingly looking towards their home as a source of alternative income and providers are looking to develop increasingly innovative products to meet people's needs. The introduction of home reversion regulation has introduced a level playing field with equity release specialists feeling more secure and looking to take the home reversion exams. SHIP will continue to play a role in protecting the industry's integrity and promoting equity release to a wider audience. There are many favourable indicators. However, there are areas were work needs to continue. There remains a sizeable number of advisers who are opposed to equity release but it is to be hoped that in time the improving perception of the industry will persuade more advisers to get involved. Providers will need to place an increased emphasis on service standards and adviser communication and will have to tackle the tricky issue of building flexible products that are in turn easy to understand. Increasing standards will remain key says Philps if the industry is to turn around the long held perceptions held by the public and the media.
"I think the equity release market is at a real crossroads," he says. "It has been doing just over £1bn worth of business per year over the past few years and current demographics means this could grow further. However, two recent mystery shopper exercises came back with bad results and despite progress being made the press only ever seems to pick up on the bad news. If this continues to happen it could have a real impact on the market."
However, despite the fact that the equity release market currently finds itself in an uncertain place those advisers who do recommend it feel that it has a bright future. Many providers and advisers feel that equity release can play an important role in retirement planning and of those questioned 74% believed that equity release will form a routine part of retirement planning in the next 5-10 years. Only 18% firmly said that they didn't think that this would be the case while the remaining 8% said they didn't know.
So it is clear that those involved in the equity release industry believe that there is real scope for the industry to develop. Steering away from the negative headlines that have so far dogged the industry's progress and focusing more on highlighting improving standards will be vital if this is to happen. If this can be done then maybe equity release will be embraced by more people planning their retirement in years to come.
BOX 1: WHAT WERE YOUR MAIN REASONS FOR NOT RECOMMENDING HOME REVERSIONS IN THE PAST?
- Unappealing plan
- FSA believes it is a high risk product
- Complex plan
- Non regulated status of the product
- Not enough understanding of the product
- Suitability for client
- Clients do not want to sell their homes
- Lack of choice
- Age of client
- Lack of flexibility
- Lack of demand
- Too confusing
BOX 2: WHAT CHANGES WOULD YOU LIKE TO MAKE TO EQUITY RELEASE PRODUCTS?
- Reduction in fixed interest rates
- All providers should charge the same and broker fees should be capped
- Ability to change the product without penalties when market conditions change
- Better commission and a better range of products
- Better contact with adviser and clients
- Easier to understand literature
- Greater flexibility
- Drawdown of funds made simpler
Source: Incisive Research
BOX 3: THE FSA BELIEVES THAT THE EQUITY RELEASE MARKET IS TO BE A HIGH RISK AREA. TO WHAT EXTENT HAS THIS AFFECTED YOUR DECISION TO ENTER THE EQUITY RELEASE MARKET?
- Encouraged to a large extent 11%
- Encouraged to a small extent 8%
- Not at all 63%
- Discouraged to a small extent 15%
- Discouraged to a large extent 3%
Source: Incisive Research
BOX 4: WHY ARE YOU NOT CURRENTLY RECOMMENDING EQUITY RELEASE?
- Not enough understanding
- Overly complex
- Poor customer perception
- Compliance risk
- Not a priority area
- Overly complex sales process
- Usually a better way
Source: Incisive Research
BOX 5: WHAT ARE THE REASONS PEOPLE HAVE FOR DOING EQUITY RELEASE?
- Better standard of living
- Home repairs
- Debt repayment
- IHT planning
- Assisting family
- Care planning
- Insufficient income
- Immediate solution
- Asset rich, cash poor
Source: Incisive Research.The way forward (PDF, 417KB)
Ramifications for advice firms
Calling for new advisers to join
Falls to 2.4%
Spent three years in the role
One of many options being 'kicked around'