Amidst the back slapping as we pass 5m auto-enrolled into workplace pensions you hear little rejoicing from financial advisers. The majority we speak to are avoiding auto-enrolment for one reason- they can’t get paid for what they do.
A buy and sell-side problem
Financial advisers have a problem collecting fees. It’s systemic; most firms have developed around regular commission runs from insurers and asset managers. These payment structures bypassed the normal business practices of invoicing and dealings with HMRC over VAT. All this was taken care of by insurers (whose services were zero rated). The RDR took away the opportunity to use commission as a payment mechanism and the banning of consultancy charging meant advisers had to directly invoice employers if they wanted to make money from workplace pensions. Put bluntly- IFAs are not very used to this, nor very good at it.
Nor are employers particularly good at paying fees for financial advice. The OFT’s famous summation that they’d never encountered such weak buyers (as employers purchasing pensions for their staff) was partly based on ignorance about what fees they were negotiating. Employers are largely ignorant of what costs are incurred by IFAs and are reluctant to pay for something that they neither value nor understand.
A stark contrast with other business services.
While there is no line in the cash flow projection for “financial advice, there is a line for accountancy costs and another for payroll costs. The success of IRIS, Sage and other payrolls in selling auto-enrolment modules as an extension to payroll services is partly down to the ease with which a regular invoice can be adjusted. Similarly, it is easy for an accountant to adjust a regular bill to include services around the implementation of auto-enrolment.
While employers will pay legal fees to conduct due diligence on all manner of purchases, paying an IFA to provide advice and oversight on auto-enrolment is another thing.
Failing to engage
“Business as usual”, has a powerful inertial drag for all kinds of employers. Working for a firm of actuaries, I have no problems submitting invoices and getting paid on “BAU” because there are people within our clients who are primed to receive and pay these bills. But when the same work is billed for services for a DC scheme, there can be push-back, because there is neither precedent nor mechanism to pay.
In announcing auto-enrolment, Government stated that the costs to firms would be negligible. Businesses were not primed to pay bills, had they been, auto-enrolment might never have happened. But the failure of Government to engage employers with the importance of paying attention to pension was negligent. Even Steve Webb has admitted that he woke up too late to the implications of the OFT report – that employers were unable to protect staff from poor practice because they didn’t know what they were doing.
The problem is becoming critical
Till now, most employers have had workplace pensions, advisers and in-house personnel who know enough. But from the back end of 2015 we hit a wall of employers who have no history with workplace pensions. A high proportion of NEST’s customers who were surveyed as part of NEST Insight 2015, claimed that they made little attempt to compare NEST to any other pension. Worse, they claimed to have no means to do so. Instead of paying advisers, these employers bought payroll software, purchased NEST and hoped.
A way forward?
The only two suppliers who small employers will pay auto-enrolment bills to are the accountant/book keeper and payroll. Neither are interested in providing advice on pensions nor do they want to be dealing with the Pensions Regulator. They see insurance and regulatory risk a-plenty .Both are happy to see advisers do this “dirty work”.
Advisers will continue to struggle to get paid as part of BAU. They may have to accept that they are paid by payroll and accountants and settle to be sub-contractors. This won’t do much for the brand, nor the pocket. For most advisers, the attractions of advising on “freedom and choice” and managing wealth looks a whole lot easier.