Protection: Back to the basics

Recently, I was asked to host a ‘back to basics’ session for a group of advisers, who used to write protection, but don’t anymore.

That poses an interesting question because if you used to do something well but don’t anymore, how do you identify performance gaps when habits have lapsed? Is it a knowledge deficit, a skill fade, or a shift in attitude?

The Consumer Duty principal serves as a reminder of what financial advice should deliver as a fundamentally basic starting point – “firms must act to deliver good outcomes for retail clients”.

And whatever area of financial advice you specialise in, I’m sure, you’re reading this saying that you do act to deliver good outcomes for your clients.

However, with protection products, it can be challenging to convey their value. These products are solutions to potential problems, and clients often struggle to grasp their own risk exposure and the potential financial impact of those risks. People rarely buy something without understanding the need.

Making protection a priority
If you’re giving financial advice to your client, protection might not always be the top priority for every client. For example, let’s say you’re carrying out a client review and you reveal they’ve underfunded their pension up until now. And you’ve calculated that their pension won’t deliver the right amount of income to support them when they retire as things stand.

You might recommend they increase their pension contributions between now and their expected retirement date. And explain if they keep up those payments until they retire, if their investment returns as expected, they’ll reach their retirement income goal.

Sound advice, but what about the risks that could derail those retirement goals?

Avoiding foreseeable harm
Unexpected events like illness, accidents, and death occur regularly. If a client becomes unable to work due to illness, how does that affect their retirement plans? Health issues might not change the retirement goal itself, but they could increase its urgency or necessitate earlier retirement.

We know that being able to fund a pension generally comes from working and earning income. And a client losing income due to illness or incapacity could impact their ability to contribute to their pension.

The first consumer duty cross cutting rule says, “A firm must take all reasonable steps to avoid foreseeable harm”.

While not everyone needs or wants protection, we should make clients aware of risks that could impede their financial objectives. Building a simple conversation into your process to talk about these risks is an example of how you can take reasonable steps to avoid foreseeable harm.

This is an opportunity to explore “what ifs.” Ask your clients about the potential impact of unexpected events and their comfort level with those risks. Would they want these factors considered within your advice and recommendations?

Interestingly, investment advice often mandates client profiling to determine risk appetite – how much risk they’re willing to take. Equally important is understanding their capacity for loss – how much financial loss they can afford. Doesn’t that sound similar to protection advice?

Keeping it simple

Helping clients understand their financial goals and how to protect them is essential to any protection conversation.

Protection is a solution, but the potential risks and the need for protection aren’t always clear to clients.

If you’re reading this and want to make protection a priority, find a way to build that into your sales process.

Keeping the conversation simple and understandable will give your clients the ability to make informed decisions where they can tell you about their goals and whether it’s important to protect them.