Clearly, it’s important for advisers to know what clients plan to spend their released cash on once they have it, because this will shape the advice and the recommendation.
But at the end of the day there is really nothing an adviser can do to stop the money being used how and when the client likes.
That might come as a surprise to some people, and there is still plenty of advice that can be provided to a client about how they might best utilise their released money.
However, if someone tells you they are going to pay off debt or fund a house purchase for their offspring, and they end up putting it in a very low-rate savings account, then an adviser clearly can’t be held responsible.
Drawdown default amounts
The responsibility of course lies with the adviser if the client has specifically told them that they intend to use the money as a ‘rainy day’ fund or a nest-egg which they’ll simply put in a savings account.
Then, clearly, the adviser has a responsibility to advise otherwise because the costs of taking that money out are going to be far in advance of a) the need, and b) the charges that will be incurred.
There is also a debate to be had in our industry around draw-down amounts and what levels they should be at for certain clients.
If a client does not need the maximum, then that’s what the advice should be, rather than opting for a default maximum amount in order to secure a bigger commission.
Paying off debts
However, back to the client’s usage of that money.
Just recently, some very thorough data from Key, which offers us valuable insight into our sector, suggested there had been an increase in the number of equity release customers who were using their property wealth to pay off credit card debts and loans.
That number has hit more than one in three and I can sense some unease in the consumer lobby about this.
However, equity release has always been used to pay off debts, whether that be unsecured – and why wouldn’t you pay off a credit card or loan with a severe interest rate – or increasingly to pay off the mortgage.
And of course we have a growing number of borrowers coming to the end of interest-only loans who might well be suitable for equity release or a retirement interest-only (RIO) product.
The point is that there is not a set structure for what clients use the money for. Debt is often paid off because, as mentioned, it can cost a lot in interest and it’s often seen as a mental drag for many borrowers.
Clearing debts at higher rates is a common-sense approach, as advisers would point out, while also ensuring the borrower knew exactly what taking out an equity release product to do so would mean for their ownership of the property, and their responsibilities.
Mindful of customer desire
Over the years, we’ve seen plenty of advertising which focused on using equity release to have fun in retirement and there’s no doubting some borrowers use their money to do this.
However, others might have different concerns, and getting rid of any debt carried into retirement is likely to be a priority for many people.
Just as helping a relative onto the property ladder might be for others, or increasingly, renovating and developing the home to ensure it is fit for purpose throughout those retirement years.
As an advice community we clearly should be mindful of a client who might wish to use equity release for a purpose which does not make financial sense, and we must also be aware of the pressure some clients are put under by family members to take out the cash to support the relative and not, for example, their own needs.
A good equity release specialist will take all this into account when working through a recommendation and will ensure the client has all the independent, professional, technical and legal advice they need, away from any outside pressures.
Doing right by the client involves all of this, but if an adviser is 100 per cent satisfied that the client is going to use the money for the reason they have been told, there is little they can do if that money is used differently in the future.