November 2007

Increase understanding

Every adviser knows the importance of good advice, and with no product is this more the case than equity release. The primary reasons for this are twofold; firstly, the age and hence, possible vulnerability of the client. Secondly, it should be considered, for all intents and purposes, an irrevocable decision which will impact what is likely to be the most valuable asset any person has, their home.

For these reasons it is imperative that a customer fully appreciates the implications of the decision they are taking. It is nigh on impossible to achieve this over the telephone and face-to-face meetings are consequently essential.

An indepth advice process is essential to enable the adviser to gain a complete picture of the client's financial and personal circumstances and to talk through options and alternatives they may not have considered. For example, using other assets and reviewing their pension provision. Furthermore, many elderly people considering equity release are not claiming all the benefits to which they are entitled. As part of the advice process advisers need to ensure they have spoken to the appropriate authority and, as a result, some are able to boost their income and put off equity release for a few years.

When to release money

Advisers often also find that many people overestimate how much money they need to release. This can be because they may be looking at doing a number of projects over, for example, a ten-year period; such as renovating the kitchen or putting in a downstairs bathroom. The client often believes it to be more cost effective to release the money all at once but, given the effect of compounding interest, this is obviously not the case.

In addition, some commentators have recently warned about wavering property prices and have stated this as a reason to release money early. This is not the case and releasing equity just a year ahead of when it is required is equivalent to a drop in property value of almost 5%; releasing two years early is the equivalent of a fall of over 10%. It is essential that the client appreciates this.

The third driver for the depth of the advice process is the issue of longevity. We all routinely underestimate how long we will live. Current regulations ensure that the client receives an illustration of the implications of their living to average mortality. The problem with this is that if you are using averages, in general, just as many people will live beyond the average as will die before. We have consequently agreed with the FSA a method of illustrating to age 100, in order to try and give a complete picture of the financial implications of taking out equity release.

Advisers should encourage the client to involve their family in the process and suggest they are present at one of the consultation meetings. This seeks to ensure that all family members understand the decision which is being taken. All SHIP members also insist on the client taking independent legal advice before completing a plan.

Get a specialist

However, equity release is a highly specialised sector and, for many advisers, they will not see enough cases to justify the time and cost of acquiring the relevant qualifications or the cost of adopting the required compliance procedures.

Furthermore, the FSA has adopted a 'no dabblers' policy and, for these reasons, there has been a growth in the specialist equity release sector, served by a range of companies.

For an adviser, outsourcing equity release to a specialist can often make sense. We work with leading IFAs, such as Park Row and Mint and have learned over time that the success of the relationship depends on a number of key issues.

First and foremost, and with the customer's consent, the adviser must be kept informed at each stage of the process, such as: referral received, appointment arranged, appointment completed, valuation instructed, offer, close and completion and cancellation, should it occur. Only then will they be able to advise their client successfully about other issues. Secondly, they must be confident that the quality of advice their client is receiving not only complies fully with TCF, as all the supporting documentation will confirm, but is of as high a standard as they give in other areas.

In short, equity release is the right option for many elderly people, but it is an adviser's duty to ensure that the client fully understands the implications of taking out a plan and the impact it will have on their estate.

Daren Carter
Managing Director
In Retirement Services