Nigel Hare Scott discusses the challenges advisers will need to overcome when recommending equity release
"Help me if you dare," said the lady fiercely to the equity release adviser before his talk to members of a retirement club at their quarterly meeting.
"You've got to be careful before doing that," said another.
"They lost their home you know," added a third.
As he set up the props for the presentation, many disapproving stares followed him accusingly as if he were a discredited used car sales representative rather than a trained professional.
The above true commentary illustrates only too clearly the task facing participants in the equity release sector. Despite the existence of Safe Home Income Plans ('SHIP') since 1991, the more recent comprehensive regulatory umbrella, and the entrance into the market of several household names as providers, equity release continues to be regarded with trepidation by so many of its target audience. As a consequence, the extensive and costly corporate advertising campaigns promoting the sector are largely wasted as they fall upon deaf ears. It's as if people would prefer to continue living in financial hardship rather than put their faith into retirement products, which are still too often portrayed, as something which might jeopardise their security of tenure.
What is particularly galling for those engaged on the advisory side is that, despite striving to act in their clients' best interest and treat them fairly, their efforts are not yet sufficiently recognised by consumers. Too often it is considered that they give priority to enhancing the commission from the business that they generate.
So how can this conundrum be resolved? A solution must be found if equity release is to reach out to its potential client base and meet the growth rates which have been widely predicted over the past few years.
However, the increased business will only appear when the public's attitude towards equity release turns from being focused primarily upon its risks and gives equivalent prominence to its rewards. This will require all those engaged in the industry to be bolder in the way that the sector is marketed. There has never been a better time for doing this as there are so many good deals available and the choice of product is enormous.
The sales processes are now widely in place to justify consumer trust. However, having secured a lead, the first challenge facing an adviser is to put the client at ease and secure their faith, both in the adviser and in the sector. The adviser will then complete a detailed 'know your customer' questionnaire, which is designed to enable the adviser to make a recommendation in the following three stages:
1. Determining whether equity release is the right way forward having assessed all the alternatives which would include downsizing, use of existing savings, other means of debt consolidation and/or different methods of financial support e.g. grants and benefits;
2. Assessing the product type that would be most appropriate, being usually a comparison between the respective merits of a lifetime mortgage and home reversion plan. This analysis requires an evaluation of the clients' preferences in their particular circumstances;
3. Recommending the product option and provider that will be most suitable. This will normally be a cash lump sum or alternatively a flexible drawdown plan. In his/her choice, the adviser will need to take into consideration the amount required to be released, the likely need for further access to funds and the possibility that the clients' circumstances might change at some future date, causing them to redeem the plan. In this regard, the early redemption charges will need to be taken into account.
In terms of treating customers fairly, there is a source of debate concerning the third stage because some advisers in the equity release market act upon a tied rather than a whole of market basis. By definition, such tied advisers will only recommend their own in-house product(s) which, in some cases, might not push all the right buttons for prospective clients but who might still go ahead with such a plan due to the lack of an alternative being proposed.
As part of a confidence-building exercise for the sector, whole of market advisers should make their clients aware that they would not get a better deal by using a tied firm, irrespective of its reputation. Similarly, it needs to be more widely understood by consumers that FSA regulation, upon the advice process including the Treating Customers Fairly initiative, has nothing to do with value - it relates to selling standards only. By making use of a whole of market adviser, the consumer is effectively 'shopping around' which is as essential for getting the best deal in the equity release sector.
As part of the assessment of their suitability for equity release, an adviser will suggest to homeowners that they make their children aware of a proposed arrangement. This is important because equity release is often more disadvantageous to the potentially disinherited than to the planholders themselves. Indeed, it may trigger an alternative solution funded by the children. It is of note that the children are often eligible for equity release in their own right if they are over 55. It is not unusual these days for both parents and their children to enter into separate plans.
Affordability, probably the most challenging aspect of residential mortgage selling, is less of an issue in respect of equity release because there are normally no rent or interest payments. Over recent months, advisers will have been taking calls from clients worried about the impact of the credit crunch upon their ability to release equity. Up to the date of writing this article, there have been no adverse effects - in fact, lifetime mortgage fixed interest rates are more competitive than ever and no provider has announced any restrictions in the availability of finance.
Reverting to the earlier issue regarding confidence and trust, although the potential downsides of entering into an equity release plan should always be made clear by an adviser, it should not be done in a manner which frightens clients off from entering into a product which is appropriate for them.
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