Article | June 2006 | by Duncan Young
Growth of the Equity Release Market
Growth of the Equity Release Market: challenges for financial planners and client resistance
There are times in the equity release market when "Waiting for Godot" seems a hugely quick process. Commentators talk about pent up demand – a lack of pension provision, demographic changes, rampant old age pensioner inflation and so the list goes on but Safe Home Income Plans (SHIP) statistics suggest that the market growth is sluggish at best. So, is this an area for financial planners to get involved in or is the hype greater than the substance?
Part of the problem is that the equity release market is still in its relative infancy and some of the market norms and jargon associated with other financial products have yet to be established. Allied to that, one part of the equity release market – home reversion plans – only got regulated in April this year meaning anyone coming to the market for the first time has to cut through the perceived wisdoms that may not be accurate.
Let’s just take one of these wisdoms – the use of the cash released from equity release. Any number of surveys point to home improvements, simple luxuries and supporting the family as key drivers in a client’s decision making process. And yet, when we have done research with the public at large on why they might do equity release, these items have not been mentioned. In fact, the overwhelming response has been a simple augmenting of income to meet day to day needs. Should we be worried about this difference or should we see it as an opportunity that financial planners could exploit?
Most equity release products are sold by specialist brokers who deal in little else. It is safe to say that they are certainly not heavily involved in the normal range of products and services provided by financial advisers. They get their business from referrals and direct marketing and usually execute the business professionally and compliantly. The largest broker, Key Retirement Solutions, has both the people and the systems to rank with the best brokers of any financial product in the country. Conversely the amount of equity release products sold by the IFA community is tiny. This difference could be down to the way that brokers deliver the service. The specialist brokers are meeting the needs of customers who have identified their wishes, while our research taps into people who have yet to see the opportunities that equity release could bring to their lives.
So, there is a possibility that financial planners are missing out if they do not offer advice on equity release. The amount of research necessary is relatively small – there are only a dozen or so active product providers in the equity release market and the Exchange has some good comparison tools. The FSA has done some mystery shopping and raised justifiable concerns about a lack of due process particularly in the area of state benefits, and while this is an important matter it should not be blown out of proportion. Many equity release cases, certainly those handled by financial planners, will not fall within range of state benefits.
Should financial planners take an active or reactive attitude to equity release? Within this falls meeting the justified expectations of clients who expect a rounded assessment of their needs and the fact that for any client’s situation there is usually more than one financial solution. Equity release is not an easy sell and clients, quite rightly, take time to decide whether to proceed. This can put other aspects of the advice process on hold which may not be in the client’s overall best interests. So simply being reactive may be a sensible way forward, but I would argue that being proactive is actually preferable.
While I do not buy into the some of the arguments for the growth of the equity release market as set out above, I do see a constant barrage of information on life expectancy and on the perceived poor values of annuities leading to non inflation linked policies being taken out. These two trends alone make equity release an important part of the assessment of a client’s needs – not necessarily that equity release is today’s buy but its availability could make other decisions easier and more flexible. In this respect financial planning for a client’s retirement and later life can take on a multi-stage delivery. An annuity or drawdown product now and equity release at a later stage, demonstrating that financial planning for the elderly is not a one size fits all approach of purchasing an annuity or other relevant product but a series of events potentially culminating in equity release if and when appropriate.
Product providers in the equity release market are yet to come to grips with fee based advisers and in all instances pay a procuration fee based on the amount released plus, in some cases, a small fixed element. The fees vary from around 1% of the amount released on a lifetime mortgage to approaching 3% on a home reversion plan.
Against the commission available in the investment world, where the decision making process is faster and less cumbersome, these equity release fees are not vast and this has led many in the industry to take a two tiered approach to equity release.
They follow the market, understand its nuances and make it part of the advice process. But when it comes to execution they refer the client on to one of the specialist brokers who have the people and systems to deliver an efficient completion profitably while paying a suitable introductory fee to the financial adviser who acts as the introducer. This is a process that I see continuing until the forecasters of fast exponential growth in the equity release market are proved right and so, in the mean time, the majority of financial planners can get on with fulfilling advice and execution together.