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Replacing the financial salesman in the workplace.

henry tapper

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“Pension Providers have for long relied on IFAs to “onboard” and manage workplace pensions. They won’t for much longer, they will need to automate the on boarding and management  processes or close to new business “. – The Pension Plowman ; May 2013

To understand this statement , let’s go back a few years.

In the nascent days of the GPP, the eighties, there were clear distinctions, IFAs dealt with people and insurers and consultants dealt with companies. The Group Personal Pension, that emerged as an entity shortly after A-day in 1987, was a hybrid product that allowed released employers from the burdensome business of having to run a pension for their staff.

The GPP was originally an outsourced occupational pension , where the management of a trust board was dispensed in favour of an individual advisory approach. The adviser was a surrogate pension manager responsible for implementing the scheme, inducting new members and maintaining a relationship with leavers . I couldn’t build up a portfolio of GPPS so labour consuming was each employer relationship.

Over time, we have seen a commoditization of support for employers with GPPs to the point that some advisers , especially those like my firm who do not take compliance responsibility for the members, can help a company set up a GPP but never see a member.

Nevertheless, the vast majority of GPPs are still the adviser’s babies. Since they have no trustees and rarely any pension professionals on the payroll, most companies with GPPs rely on the IFA to install them, help them manage in new joiners , provide sessions to explain the arrangement to those staff in the scheme and some support to those leaving, especially those retiring.

It is this relationship which the abolition to consultancy charges and the threat to commission radically changes.

The presence of an IFA on site becomes a “given”. “you’ll be getting a visit from Henry our financial man” was part of the induction letter that went out to staff at one of the companies I used to look after. Nobody quite knew who I worked for, but from the way I swaggered around the shop floor in my suit, I suspect most of my customers thought I was part of the management. I don’t ever remember being asked who paid me, I was just something that came with the job – like the induction letter said.

In fact I was being paid for out of their pension pot, and in many cases, I still am. Even though the company I’m thinking of wound up many years ago, the majority of people I saw were no older than myself and will still be working, waiting to draw a pension which  may have up to 4.5% pa taken from it to recover commission paid to me in those years. I would be surprised there has been much growth in their posts in the past ten years.

This is the fundamental deceit of old school pensions.What seemed “free” and seemed “easy” was not free to the member or easy to the adviser.

For all my swagger, I did not become rich from my efforts.

I was a financial salesman dressed up as a financial adviser. I was paid to maximise the contribution from each employee. But the employees were in no position to save, lapse ratios were appalling as was staff turnover. Most of my work was counter-productive.

Had I understood market segmentation, I would never have bothered explaining complex financial matters to people with no interest or aptitude for my arguments. Nor would they have countenanced calling me over to discuss the time of day , if they knew the damage my relationship would be doing to their pension pots today.

If I paint a grim picture with no winners, I have only half filled the canvas. For there were winners from all this. “Upstream” were the broker consultants, the sales managers , the product managers , the underwriters, the fund managers and the Directors of the insurance companies who received the money. They would keep me happy with lunches and the odd ticket to a football game and in return I and my client would pay their wages and keep them all in company cars.

It is a grim truth but it was never those at the foot of the pyramid who benefited. Money flows up the pyramid in financial services “contra natura”.

But now the pyramid is being dismantled. The Advisers are leaving the workplace, their pay and rations have been terminated. To their general dismay, the buck that was passed to advisers in the late 80’s has now returned to the insurer and the employer.

The memories of the 12 years I spent in my twenties and early thirties as a commission only adviser are vivid. I was poor and so were my clients and what money I made my clients the poorer still. I cannot think of many of them without a mixture of affection and personal guilt.

I know most of the big-wigs in the providers today, many of them were in the pyramid above me then. They never advised clients directly nor experienced the horror of a negative cheque at the end of a month (when commission clawback exceeded money earned). For them, the gravy train has hit the buffers and they have gravy down their shirts, but they still have their cars and their occupational pensions and job security.

All most of the people I advised have got to look forward to is the shriveled stump of a savings pot devoid of growth.

So if you hear stories from providers of the “advice gap” be aware. The system that has been in place these past 25 years has served few well, it has brought pensions into disrepute among a substantial proportion of the population, it has created a sub-group of bitter ex-advisers who feel guilty and let-down and it has created among employers a suspicion of pension people as pariahs who prey upon their workforce.

This is the legacy of 25 years of commission-based GPPs and it is why I am glad to see the back of commission and consultancy charging. The financial salesman is well out of the workplace but will he be replaced?

To stay in the game, the insurers who relied on commission based IFAs are going to have to spend money creating a replacement infrastructure to “onboard” new schemes and auto-enrol new entrants. They’ll have  to provide the day to day support to their policyholders and  ensure they get proper help when they want to draw on their pension savings.

This is a major undertaking and I fear there will not be an appetite among some providers to take on this new challenge. I sincerely hope this does not happen. There is not just an advice gap, there is a gap in good quality workplace pension provision for the 1.2m employers yet to stage auto-enrolment.

There are, since the RDR, hundreds, maybe thousands of corporate financial advisers either unemployed or trying to enter new professions. We can no longer afford them, they have been made redundant by regulation which assumes they can be replaced by technology. The old role of adviser as on-site salesman has disappeared

Auto-enrolment killed this kind of adviser as video killed the radio star.

But technology cannot replace lawyers and accountants and nor can it replace the need for financial advice among those most vulnerable, those approaching and at retirement. They have wealth to be managed and the decisions they take will impact the rest of a lifetime.

The providers who have built relationships with these advisers would be well advised to think of redeploying their skills in helping the pots that have been built up in personal pensions decumulate to the advantage of the pensioner.

The very best advisers will be able to make this transition themselves, most already have. It is the insurers that took a bet that the pyramid would remain intact post RDR, who have most to do. The few advisory firms who took a bet that members could continue to be charged for the on-site salesman.

The transition which must happen over the next six months as we prepare for 2014 and onwards will be expensive and traumatic, let’s hope it does not drive the remaining good advisers out of the market, let’s hope we see no more insurers close their doors to new business.

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