No doubt you have seen column inches devoted to the Financial Conduct Authority’s (FCA) decision to consult on a ban on contingent charging for Defined Benefit transfer advice. Here we explore the implications of a contingent charging ban and question whether we’ll see more advisers move to a flat-fee structure.
In the FCA’s paper on the subject, they said:
“We are concerned too many advisers are delivering poor advice, much of it driven by conflicts of interest in the way they are remunerated. In particular, the practice of contingent charging creates an obvious conflict.”
The regulator estimates ‘harm is created on up to £2 billion a year’ in unsuitable transfer advice. Let’s extend that further to contingent charging in general – for all advice – and whether conflicts of interest really do give rise to bad advice.
Removing conflicts of interest
The FCA’s announcement relates to new rules that will force advisers to demonstrate why a recommended scheme is more suitable than a workplace pension, with the aim of ensuring consumers avoid being hit with unnecessary ongoing advice charges. Their concern is around the longer-term conflict of interest created by ongoing charges, especially for Defined Benefit transfers for pots of over £350,000.
I can understand the regulator’s concern, although there will always be ‘cowboys’ who act unscrupulously and fleece clients for all that they can. Will a ban on contingent charging make any difference? And – this next point has been raised by several of my adviser contacts – what right does the regulator have to dictate the way firms charge for their advice? We already work in a tightly regulated market, so as long as any fees are clear, transparent and mutually agreed, why should the FCA have a say?
Earlier this year the New Model Business Academy asked financial advisers whether they believed a ban on contingent charging would improve the quality of pension transfer advice. The result: almost three-quarters (72%) of their membership answered ‘No’ – irrespective of a ban, bad advisers will still give bad advice.
Move toward menu-based charging
Over recent years I’ve seen an increase in the number of advice firms moving to a ‘menu for service’ fee model. This involves time costing each piece of work and applying an appropriate profit margin. The base-line fee can then be adjusted if the work involved is more complex or likely to require additional time/resource.
This menu-based charging approach is built on the premise that the process and steps involved in delivering each service remains the same, irrespective of the size of the investment. The menu model ensures clients’ only pay for the service they receive – a stark contrast to the traditional percentage-based charging model (i.e. where there is a tendency for clients with larger portfolio values to subsidise those with smaller pots).
With regard to ongoing advice, these firms cost out the level of service the client will require in order to stay on track toward achieving their financial/lifestyle goals. Then, upon agreement with the client, fees are taken in the most efficient way – usually from the product or investments.
These advisers typically charge for the financial plan; the client then has the option of implementing the plan with them or going elsewhere. The client pays for the work undertaken (ensuring it is valued, because as we all know value is rarely attributed to items given away for free) and the fees charged are completely desegregated from any recommended product or investment. In some cases, the adviser may recommend the client ‘does nothing at all’.
To me, this model makes perfect sense. Clients only pay for the service they actually receive. And, because advisers are commercial businesses and not charities, a suitable profit margin is factored in.
Fuelling the Advice Gap?
I realise not all advisers are ready or willing to move to flat fees or menu-based charging, so an unintended consequence of a contingent charging ban could be a growing advice gap (at the time of writing an estimated 29 million Britons are unable to pay for advice).
Many retail clients don’t have available funds outside of their pension to pay upfront fees, which means vulnerable clients will be unable to access advice. As a result, the Defined Benefit market could become the preserve of wealthy consumers.
Furthermore, many commentators believe – and I agree – that imposing a ban will reduce the number of advisers willing to operate in this area, creating further barriers to advice. At the same time, a ban would not act as a deterrent to those who plan to mis-sell.
Rather than imposing a ban on contingent charging, why doesn’t the regulator increase the qualification requirements for those advising on Defined Benefit transfers? Some advisers believe a solution could be to only allow Chartered Financial Planners to give advice in this area. Could this serve to take the reins back from the cowboys…?