The Earth isn’t flat. How contingent fees can deliver the best outcome for customers – Peter Doherty

tideway6

“This article has been sent me by Peter Doherty, CIO of Tideway Investment Partners  It makes the case for fees for transfer advice only to be charged in the event of a completed transfer and not in the case of Tideway providing  free guidance which results in a DB scheme member deciding not to transfer out. This does not represent the views of Henry Tapper, mine are already published. But it puts forward the opposite case, one that I am happy to post on this blog. Infact I am grateful to Peter for this well-argued position.

 

 


Summary

There has been plenty of criticism directed towards advisers who charge contingent fees. I believe that this criticism is wholly misplaced and that in fact for many transactions, non-contingent fees are likely to deliver worse outcomes for customers.

Furthermore, it is easy to show that non-contingent fees generate a much higher total fee pool for advisers than contingent fees and with no additional benefit to customers.

 

Understanding incentives

The single most frequent and (sometimes only) criticism of contingent charging is that this creates an incentive structure whereby advisers entice customers to do something they otherwise would not and should not do.

Implied in this criticism is a degradation of the quality of advice in exchange for a fee. The narrative is: “Mr Smith should not have done XYZ. He would not have done so but he was pressured into it by his adviser who was only interested in getting the transaction fee. As a result, Mr Smith received poor and inappropriate advice”.

This criticism and related supposition are deeply flawed and here is why:

Commoditised activities

A fee for professional advice or a professional service can be thought of in two ways. The first and only way considered by contingent fee critics is as a payment for a process that ends immediately, at the point of transaction closure. There is no reasonable expectation of any future interaction with the customer and the probability of any future claim or challenge arising from the advice or service is negligible. These are what I call “commoditised activities”

Commoditised Activities include high frequency, lower value tasks such as conveyancing and SME audits and fees for these activities have collapsed in recent years. Templates and software cover off a large part of the work.

Accountants, Solicitors, IFA’s and others are battling this commoditisation and many are losing. Some professions such as Actuaries and Fund Managers have been somewhat protected by oligopolies, where no one market participant breaks rank and materially lowers the fees charged. But the trend is clear for everyone: fees are collapsing for low value, routine activities.

Value-added activities

A fee can also be thought of as an insurance policy against future claims arising. Looking at a fee this way immediately neutralises the criticism that contingent fees drive poor advice. For high-value, higher risk, compliance-heavy complex advice, it is not an act of altruism to get the best outcome for the customer – it is the only way to rationally behave as an adviser. Of course, advisers who are not smart enough to work out that they are building up a stream of future liabilities by giving poor advice may continue to do so. But thoughtful, high quality advice is a way to deliver the best outcome for the customer and minimise the risk of future adverse claims. This is an alignment of interests, not a conflict, between the adviser and the customer.

Charging on a percentage basis is also entirely rational: the size of the fee is aligned to the size of the transaction.

Why non-contingent fees for DB Transfers are a terrible idea

Now that we better understand the breakdown of fees into “commoditised” and “value-added” components, it is obvious that for DB Transfers a non-contingent fee structure would simply increase the total fee pool for advisers.

In a world where everyone pays the same fee irrespective of transferring or not, the fee charged for completing a DB Transfer would not go down. That fee is paid for detailed and complex advice around an irreversible transaction and, as described above, represents an insurance policy against future claims. With non-contingent fees the whole DB Transfer population – the scheme members – could only be worse off.

Under the logic of non-contingent charging, the fee for doing nothing must be the same as for doing something, otherwise there is an explicit subsidy and that is not allowed either. So, all that would happen with the introduction of non-contingent fees is that thousands of customers would be charged thousands of pounds for “not doing something“.

Does anyone think that equality and fairness comes from charging someone £ 10,000 to make no change to their financial circumstances? That cannot be right.

Balance

The full picture is a balanced one and at Tideway we think we have the balance about right.

As an alternative to charging people for deciding to do nothing, Tideway provides free education, guidance and as many meetings and additional information as is necessary for a person and their family to come to an informed decision about a DB Transfer.

We have direct experience in dozens of cases, involving CETVs of up to £ 3 million, where we have met potential transferors and spouses on several occasions and have provided multiple scenarios of future outcomes. For a variety of reasons, people then make a decision to stay put, either “for now” (and to revisit the transfer option later) or “forever” (by taking benefits now).

We are very happy for those people and support their decision to hold off from transferring out.

Over the past two years, Tideway estimates that:

    • About 30% of the people making an initial DB transfer enquiry to us have gone on to transfer out
    • Some 70 % of people making contact with us have had some combination of free guidance, a free initial appraisal and a free advice report and have not transferred through us. They have either not transferred or have gone elsewhere to transfer.

Tideway’s DB Transfer process is clear:

    • We provide free advice, a free initial appraisal and a free Transfer Report
    • We give people time to consider their options and do not chase them
    • We never use cold call leads – interested individuals contact us via referrals or our website
    • Our advisers are not paid commission, but a basic salary regardless of the number of completed cases

We are proud of these processes and are genuinely un-phased by having worked for free with hundreds of people who in the end did not become customers of ours.

Who is promoting the view that non-contingent fees are best?

You have to ask yourself where the drive to charge people for doing nothing comes from.

One possibility is that some firms or professions are not prepared to do anything for free. Every hour, every phone call, every email must be accounted for and charged for. What could be better than a high volume of low-risk “advice” via phone email and in person, all charged out to cover overheads and generate risk-free profit? That is a real risk for customers.

Another angle is that those crying out about contingent fees are in one way or another paid by DB Schemes. The longer the DB schemes stay in business and the bigger they are, the higher the total fee pool. Every DB transfer out represents a small but real reduction in the future fee pool.

If DB scheme members are going to be charged a fee for not doing a transaction, many of them will not bother to ask or find out what their options are. That cannot be in customers’ best interests.

Peter Doherty

Managing Partner and CIO

Tideway Investment Partners LLP

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in advice gap, pensions and tagged , , , . Bookmark the permalink.

6 Responses to The Earth isn’t flat. How contingent fees can deliver the best outcome for customers – Peter Doherty

  1. Q: Who is promoting the view that non-contingent fees are best?
    A: The FCA

    Liked by 1 person

  2. “You have to ask yourself where the drive to charge people for doing nothing comes from.”

    Some of what you say has merit. But the above is daft. With a well-crafted and (much more importantly) well-explained TVAS you are giving people something of immense value. Whether they transfer or not, they are doing something: a decision to stay put is doing something.

    If they decide to transfer, that’s just a commoditised process. In and of itself, it has little value.

    Liked by 1 person

  3. IFA says:

    Simply unbelievable. His reasoning is so flawed. He views advice to remain within a DB scheme as “nothing” and tries to argue that advisers will advise everyone to remain in a DB scheme and collect a low risk fee. He conveniently forgets about the annual fee the IFA will collect which acts as an incentive to recommend a suitable transfer. Also advice to remain is not “nothing”. Clients approach IFAs with the following question “Should I remain in my DB scheme or should I transfer out?”. Answering that question takes a lot of work and complex skills. If the end result is the client should remain in the scheme then the client has achieved a good outcome and they have used hours of a skilled adviser’s time which shouldn’t be given away for nothing.

    I must admit when I read the line “some firms or professions are not prepared to do anything for free. Every hour, every phone call, every email must be accounted for and charged for.” I thought this was a satirical article. Someone should really explain how a business works.

    Then I read the line “If DB scheme members are going to be charged a fee for not doing a transaction,” and I realised this isn’t satire, this is a man who could sell used cars or office supplies but is instead selling pensions. Advice to transfer out of a DB pension is not about a transaction, it is about mapping out the rest of your life and making predictions about how your finances will be affected over a lot of uncertain years. It is nothing to do with a product or a transaction.

    I must admit that I had heard bad things about Tideway before I read this article. Now I am abhorred by them. It is incredible and so worrying that a big national company like this can have this mindset. Contingent fees might benefit a small number of clients but they are being abused by some IFAs. Until now I thought they were being abused by small IFAs but now I see that big companies like this are not just using contingent fees but are actively defending them with shoddy arguments and half thoughts which don’t stand up to even the slightest scrutiny.

    I wonder if Tideway will get me a good price on a nearly new car if I agree to let them look at my pension for me.

    Liked by 1 person

  4. IFA says:

    “genuinely un-phased by having worked for free with hundreds of people who in the end did not become customers of ours.”

    Probably because the 30% of clients who did transfer were charged more than they should have been (on a simple cost per hour basis) to cover the 70% who didn’t pay any fees.

    ” Does anyone think that equality and fairness comes from charging someone £ 10,000 to make no change to their financial circumstances?”
    An average adviser fee per hour is between £150 to £250. Add VAT and you get a top fee of £300 per hour. Do Tideway plan to do 30 hours of work per client? If not where did £10,000 appear from?

    “We provide free advice, a free initial appraisal and a free Transfer Report”
    If you’re good at something don’t do it for free.

    “generate risk-free profit?”
    Advice to remain in a DB scheme is not risk free. If Tideway believe this is risk free this also logically means that no-one should ever be advised to leave a DB scheme, yet this entire article is about them doing this work.

    The only logical part of this article is that purely non contingent fees make no sense. Advising someone to transfer out and implementing this advice brings with it extra work and extra risk and both of these things need to result in an extra fee. Other than that this article is nonsense.

    Liked by 1 person

  5. Eugen Neagu says:

    I think that he misses the point.

    It is not about what are the options, but about making a personal recommendation, which says:

    “Mr Client, on the balance of probabilities, I advise you to transfer / not to transfer from the ABC pension scheme as you will be better off / worse off and you will (or not) achieve your stated objectives and your retirement needs.”

    Clients cannot make an informed decission knowing the options, they need a personal recommendation.

    There is not such thing as “free” advice, this is just advice subsidised by clients who proceed with implementation. The implementation charges (initial and ongoing) for these people are not that cheap and I am willing to compare our menu with their menu.

    We are not looking for transactions, in fact with many clients who we advice not to transfer we build long term relationships.

    Like

  6. John Hutton-Attenborough says:

    “Some 70 % of people making contact with us have had some combination of free guidance, a free initial appraisal and a free advice report and have not transferred through us. They have either not transferred or have gone elsewhere to transfer.”
    A free advice report on a DB transfer……surely the business is liable for the advice given whatever that may be and could be open to future complaints for the advice provided.
    Cannot believe the PI insurers are comfortable with this….

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s