Financial advice firms are “sitting on a ticking time bomb” of potential complaints, EV has warned, after its analysis revealed that pension drawdown clients are being exposed to high-risk investment without their knowledge.

The analysis showed that just over three quarters (76 per cent) of funds used for drawdown clients were at the high end of the risk spectrum, with more than half of these funds having 'retirement' in the name.

However, this contrasts with data from EV’s income risk questionnaire, which showed over 85 per cent of retirees have a low to medium appetite for risk to their income, suggesting that investors in decumulation are ‘unwittingly’ being exposed to higher-risk investments beyond their comfort zone.

“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,” commented EV founder, Bruce Moss.

Moss said that 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,” he continued.

“In recent years, clients have been insulated from some investment risk, with exceptionally benign equity markets around the world at, or close to, all-time highs.

“A potentially sharp reversal, which could come at any time, could create a serious loss of income for many retirees and cause considerable hardship.

“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.”

The findings also follow the Financial Conduct Authority’s (FCA) recent review of retirement income advice, which highlighted deficiencies around aligning investment solutions to the client’s risk profile and tolerance level.

According to the regulator’s assessment of advice models and advice files, all the 24 advice firms sampled made no clear distinction in their risk profiling approach between accumulation or decumulation, despite the fundamentally different risks consumers face during these stages.

The FCA report also revealed that only 30 per cent of advice firms’ investment portfolios were constructed specifically to meet the needs of customers in decumulation.

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