In today’s post we take a look at Pension Transfer Regulation COBS 9.2.2 Experience and Knowledge.
Section 1 parts (b) and (c).
1. A firm must obtain from the client such information as is necessary for the firm o understand the essential facts about him and have a reasonable basis for believing, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended, or entered into in the course of managing:
(a) meets his investment objectives;
2. The information regarding the investment objectives of a client must include, where relevant, information on the length of time for which he wishes to hold the investment, his preferences regarding risk taking, his risk profile, and the purposes of the investment.
3. The information regarding the financial situation of a client must include, where relevant, information on the source and extent of his regular income, his assets, including liquid assets, investments and real property, and his regular financial commitments.The FCA
Pension Transfer Regulation COBS 9.2.2 Experience and Knowledge
Below is a personal analysis of Section 1 parts (b) and (c).
Please note this is open to interpretation and subjective.
If you need financial advice you need to go to the FCA register and look for an authorised and regulated advice.
Ready? Let’s take a look at Section 1 part b.
(b) is such that he is able financially to bear any related investment risks consistent with his investment objectives;
So, you make the decision to transfer your safe and secure ‘safeguarded’ defined pension benefits to a defined contribution pension (retirement account, SIPP etc) and you now have all the investment risk.
If the stock market collapses and your fully invested your whole fund may be wiped out.
What’s the likelihood? At the time of writing this the stock markets are crashing!
Much depends on how you are invested, the broader economic world and of course whether your investments recover by the time you start pension drawdown (taking income from your pension).
This part, er, part (b) relates to whether you can withstand the losses you may incur.
An efficient investment objective setting review will ensure that ‘realistic’ objectives are defined.
There’s little point in having ‘unrealistic’ objectives based on idealistic scenarios that have more foundation on wishful thinking than cold facts.
These cold facts must be within realistic time-frames first and foremost.
Unexpected events can only be factored in to a certain degree.
You can read a forecast of the weather tomorrow but that doesn’t mean it will happen.
You can pick lottery numbers but that doesn’t mean they will ‘come up’.
You can invest in shares, ETFs, gilts and bonds but that doesn’t mean you will get a return.
Are your investment objectives aiming at returns that are above the parameters of risk that the ‘investments may potentially achieve’?
You need to be honest here.
IF so, further evaluation is necessary.
You must be aware and understand this.
Most ‘losses’ are usually failing to grasp the level of risk exposure of investments.
If an elevation of risk is necessary this must be supported by other investment experience. And this may be previous experience of share/bond related investments, held within an Individual Savings Account (ISA) for example.
Likewise, if you’re a completely new investor (with no prior investment experience) caution and education is a good starting point.
Just because there is no prior experience doesn’t mean investing your pension pot cannot be taken on.
Everybody starts somewhere!
And remember, by the very FACT you transfer away from a defined benefit pension to a defined contribution pension you have automatically become an ‘investor’.
The consistency of risk with realistic returns will help to ensure that ‘capacity for loss’ if and when tested will prove resilient.
This means if the right level of risk is taken if losses happen (and they do frequently) then your overall financial position is able to ‘bear up’.
Meaning, if your transferred pension funds go to ZERO (because theoretically they could) then you are able to withstand this.
Remember, the assessment of capacity for loss is easier to determine than ‘real’ investment risks associated with investing itself.
Because once a thorough analysis of your financial situation ‘in entirety’ is complete you will be able to contrast potential losses as a percentage of your overall financial position.
In terms of capacity for loss, a thorough evaluation of the impact of losses down to zero must be performed and the impact of this on your overall financial position provided, just to reiterate
Pension Transfer Regulation COBS 9.2.2 Experience and Knowledge
(c) is such that he has the necessary experience and knowledge in order to understand the risks involved in the transaction or in the management of his portfolio.
Experience and knowledge are pivotal to taking risks with investments.
If an individual’s investment experience is limited to ‘no risk’ savings accounts and/or National Savings and Investments (NS&I) products it’s going to be difficult to demonstrate any relevant experience with risk/loss.
On the other hand, an individual with multiple investments spanning several asset classes over a number of years will be easier to classify as an experienced investor who understands investment risk.
Which are you?
When will this become a problem, if ever?
Well, just think.
Maybe the ‘investment portfolio’ is full of ‘lame ducks’ and ‘dogs’.
Returns are dismal and charges (ongoing advisor charges, transaction charges, platform charges and of course investment manager charges) have taken a large chunk of your funds.
Then the markets collapse.
- You will then question the investments within your portfolio.
- You will then ask questions about ‘ongoing advisor charges, transaction charges, platform charges and investment manager charges).
- You will be meticulously analysing your portfolio.
- You will be making judgements on risk exposure.
- You will be seeking outside help to analyse exactly the mess you may be in.
So, why not avoid all that unnecessary anxiety in the future.
Take stock. Take responsibility.
If your knowledge and experience is lacking it’s time to start educating yourself and getting the right kind of knowledge.
Experience is different. Behavioural biases are different. Perceptions are different.
But there is lots you can do to ensure you are ‘mindful’ of your own ‘self interest’.
So, have you got the necessary Knowledge and Experience?