Is honesty contagious? More on pension charges.

Insurance

Insurance (Photo credit: Christopher S. Penn)

I’ve just read an excellent blog by Alastair Conway of Cofunds published on FT Advisor. It deals with the issues IFAs are facing as they enter the new world formed by the Retail Distribution Review and focusses on the adoption of good practice in the disclosure of charges on retail platforms.

You may think this is obscure but it’s deadly important- it goes to the heart of the way Britain’s multi-billion pound fund industry works and how advisers are paid.

In my view, and in the view of my firm, the payment for advice should be linked to work done by the adviser – measured by quantity and quality. The issue of how much money is being advised upon should not be driving the adviser charges. Therefore I and my firm do not work on commissions.

There is a loophole that allows retail customers not to pay VAT on advice because the advice relates to “insurance products”. We don’t see why advice on two identical funds, one of which is wrapped by an insurer, one unwrapped should give the insurer a 20% pricing advantage and neither we suspect does HMRC. The argument that commissions from insured products give consumers a VAT advantage is ,to put it mildly, tendentious.

So we adopt a simple approach to charging our customers, we declare our chargeable rates, we record our time, we bill our clients and if our bill is challenged we refer to our time sheets. We charge VAT on all advice and if our clients can’t reclaim the VAT, we would rather find ourselves uncompetitive than risk our and our client’s reputations from a future challenge from the VAT man.

That way, our focus is on doing good work, with no shortcuts and with total disclosure. It works very well in a business to business world as this is the way professional services are always dispensed.

In Justin’s blog I found these  two very telling paragraphs.

The decision to support clean share classes is also future-proofing our business. In its latest platform consultation, the FSA confirmed intentions to ban cash rebates between fund providers and platforms from 2014 and while the CP12/12 recommendations have their flaws (the confusing retention of unit rebates; exclusion of insured funds from the proposals) the message is clear: life is going to be easiest for those platforms, advisers and fund managers who embrace pricing in its simplest form.

This is an essential step towards enabling people to accurately assess the value of the service they are receiving. If you believe in the value of the service you provide, as we do, then you’ll have nothing to fear from justifying the explicit charge.

If an organisation as powerful as Co-Funds is prepared to adopt this position, I suspect it is likely that the others will follow. It will be painful for many and I am sure that many customers will be shocked to understand the true cost of the funds they are employing (especially when they compare charges with recent returns on the funds they use).

The quoted passage also refers to the exclusion of “insured funds” from the FSA’s CP 12/12 recommendations. The ABI really needs to fall in line with the approach to be adopted by the non-insured platform providers. Otherwise we will have a “clean” and “dirty” world where the insurers will be in the dirty camp and the rest will be clean.

Many insurance companies offer clean and dirty approaches to fund charging on one platform (and we as advisers have to make sure our clients stay on the clean side of the fence). The sooner insurance companies agree to fully disclose th total costs of the funds they offer and how these are apportioned, the better.

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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