The argument for contingent charging (in abstract)
The best case for contingent charging appears on this blog and it’s made by Pete Doherty, Managing Partner and CIO of Tideway. I published this blog to provide balance and to create debate. This is the nub of his argument..
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.
These arguments were made, at the time of the Great British Transfer Debate. At that event, Rory Percival made an alternative argument. He pointed out that in practice, contingent fees could open the sluice-gates and empty the pond. Rory has been proved right.
Last week, Barclays published the amount its pension scheme had paid out in transfers in 2017. It was a staggering £4,152,000,000. A figure of just under £3bn is reported by Lloyds. Financial institutions are reported to have been most affected by transfers, probably because they have de-risked further (with higher CETVs resulting from lower discount rates) and because their members tend to be more financially self-confident.
But the fact remains that these numbers are business as usual. The FCA may have thought that BSPS was a one-off but they are wrong. While BSPS was unusual for a blue-collar scheme, the peculiar circumstances of “Time to Choose” has merely pushed it into the territory of the de-risked schemes – typically the banks. The average CETV from BSPS- after the 5% clip for insufficiency, was paying around 25 times the prospective pension, the average CETV from the gilt-based schemes like Lloyds and Barclays – around 40 times.
BSPS was special, only in that disrespect for the covenant and a time-bound transfer period herded behaviours into a mass emigration.
The FCA has no idea of the scale of transfers across the entire DB constituency. Barclays (I suspect) published the CETV figure to explain how their DB fund had gone down, rather than to alert the FCA. There is no statutory requirement on trustees to publish the outflows from CETVs either to the Pensions Regulator, the FCA or indeed the PRA.
KPMG have told me, they estimate the take up of CETVs across the DB piece to be c£6bn. I now know this to be a wild underestimate. I would be surprised if it was less than £60bn. The KPMG underestimate is likely to be (lack of) evidenced based. Where there is no systemic reporting, under-reporting is the likeliest outcome.
Why have CETVs become business as usual
The principal reasons for the massive increase in transfers (CETV pay outs quadrupled from 2016 to 2017 at Barclays) can be ascribed to three things
- Telephone number transfer values driving consumer behaviour
- Advisers like Tideway seeing waking up to an opportunity
- The practice of charging contingent fees that made a transfer painless.
I see no reason for the speed of transfers to slow down. Employers are relieved to get liabilities off balance sheet at well below their accounting cost.
Trustees and the Pensions Regulator see the solvency of their scheme being technically adjusted in the right direction.
Advisers, product providers and asset managers share in the dispersal of institutionally managed assets into higher margin advised retail assets.
The FCA has no understanding of the true nature of the problem. As at Port Talbot, they are blind-sided by a lack of evidence and a lack of day to day communication with people on the factory floor (in this case the administrators of the DB pension schemes like Barclays).
Time for change
I am reluctantly calling for a change in the law. We have a Finance Bill coming up and I call for it to contain a section banning the use of contingent fees for those advising on transfer values.
My argument for this is simple. It is Al Cunningham’s defence.
People who transfer must consider themselves in special need of a transfer.
The FCA in its sampling of CETV transfer advice has found that 53% of cases they examined showed either questionable or wrongful advice. If we are to accept the sampling methodology (and I do), we can infer that over £2bn of Barclays transfers and £1.5bn of Lloyds Bank transfers were questionably advised (or worse).
The FCA found no good reason for 53% of the people advised, to have taken their transfers.
By banning contingent charging , the FCA will make itself hugely unpopular. It will outrage those advisers, like Tideway (who claim to have done 1400 transfers over the period). They will be open to claims that they are closing the door on freedom and choice. They will be shouted at by the people who now have to fund transfer advice out of their own pocket. This will not be a popular move.
But the simple argument remains. If you have a special reason to transfer, you will find a way to meet fees upfront and in full.
All of the evidence I have from advisers is that by moving away from contingent fees, they see levels of transfers fall of a cliff. People see the need for a transfer disappear when they are asked to find the means to pay for the advice in advance of the advice being given.
I would add a second question.
If you cannot find a means to pay for your transfer advice, can you really afford to manage your own retirement finances?
It’s a matter of conviction
I’ve been an IFA, now I work for actuaries; I helped people transfer, I now advise trustees and advisers on transfers. I am convinced that the FCA are right and that at least half of the transfers that are made are questionably or wrongfully advised. Questionable advice amounts to wrongful advice, there has to be a special reason to transfer and in more than 50% of the cases the FCA have looked at, there is no special reason.
If you have conviction , as I do, of the value of a pension, then you will be heartbroken to see the Barclays, Lloyds and BSPS numbers. I am especially heart-broken because I know of many other instances where schemes are being denuded of future pensioners because of questionable advice delivered on a frictionless basis through contingent fees.
Pete Doherty’s arguments are based on abstract notions that have not been born out in reality. The reality is the evidence that is coming to light and is laid out in this blog.
This blog is simply an extension of the blogs I wrote after my time in Port Talbot. It extends the call to action to meet the particular challenge of the sausage and chip brigade, with the wider challenge presented by contingent fees.
I call on all who have conviction that schemes pensions remain the best way of providing people with retirement security to join me. We need a change in the law. We need the charging of contingent fees to be banned.
Enforcement
I have heard it argued that smart advisers and their clients would find a way to be compliant and still be complicit in the taking of contingent fees.
They reckon without the impact of legislation on Professional Indemnity Insurers. If a PI insurer was to spot such practices, they could withdraw cover or increase premiums to the extent that no sensible adviser could stay in the market.
If the Financial Ombudsman was armed with principal based legislation that allowed him to look through to the contingent fee and see deliberate avoidance of the ban, then enforcement would be through the financial restitution met by the PI insurer. My experience of PI is that material non-disclosure would invalidate claims.
Any adviser who thinks that a ban on contingent fees is unenforceable by the FCA, reckons without the power of FOS and PI.
The idea that it is inappropriate to charge fees for advice which leads to no transfer is fundamentally flawed. The fact is that advice has been given. The argument for contingent fees has an interesting counterpart in the world of insurance; it is akin to saying that we should only charge premiums to those policyholders who have suffered misfortune and claim under the policy.
Henry
The job of an IFA changed in 1988 before that date the majority were policy peddlers and most failed leaving with a chip on both shoulders that’s why we are down from over 300,000 to less than 10% of those numbers and about half of the remainder are whole of market
I would argue that we are mopping up the mess of DB miselling where those responsible naturally wish to avoid compensating the members.
I am not sure that you take enough note of the effort that goes into correctly advising the individual stuck in failed schemes
Your arguments on the way ifas are paid are arrogant and misinformed why not concentrate on getting your DB issues resolved before straying into areas where your pre 88 knowledge is irrelevant to the modern world
Kind regards
John (IFA since 1973)
interesting view that tideway only see advice to transfer as doing something?
So hold on…the member has a choice for their retirement needs.
1) Stay in the scheme
2) Transfer
If the in depth analysis and sustainability modelling demonstrate that the best course of action is to remain…that adds no value to the client? Nonsense.
I can only assume that Tideway do not do any meaningful analysis, sustainability modelling or creating a personalised financial plan so the the only value they are delivering is investment implementation.
That quote from Tideway….priceless drivel.
All commercial activity introduces some conflict of interest and what matters is how it is managed and how managing conflict is supported by good regulation. Let’s keep a sense of proportion here.
I can’t speak for Tideway but I think their charging approach is close to ours at Fowler Drew. We find a degree of commonality about this amongst those transfer advisers who are motivated, like us, to provide ongoing holistic management of wealth. We typically observe three components:
1. A quick and dirty test of the prima facie case for a transfer increasing personal utility
2. A full analysis and report
3. A transaction that may call to be executed
We believe most firms, like us, do not charge for the first. It is a form of new business acquisition cost but not a large one. As such, it is also probably testing whether the overall management proposition (assuming a transfer) makes economic sense for both parties. Each party is qualifying the other.
The second is where the client probably assigns most of the value: getting to a good decision with clarity, composure and not too much time or effort. Unfortunately, clients will not typically assign the same value if the good decision (in spite of the first test) is to stay. Though advisers must lean against this behavioural bias, there is not much they can do to prevent it. It is one of the reasons why the third charge, contingent on the transaction, is often higher than the second. The requirement that the advice be holistic will put upward pressure on the second. Indeed, it may be linked to, or replaced by, a separate charge for a holistic financial plan of which the transfer advice is only part of the deployment scope of the plan.
This runs into another constraint that may be either ‘true’ or a behavioural basis. Clients may resent paying ‘hard cash’ from a non-pension pocket as opposed to paying out of a pension pocket into which the CETV value has been paid. The whole fee may therefore get dressed up as a new pension arrangement fee.
Finally, as you’ve pointed out, Henry, the illogical HMRC VAT treatment between advice fees and transaction fees may be contributing to a bias to more of the fee being contingent. Clients go along with the tax saving.
The third charge is and should be a perfectly genuine contingent fee. The liability for advice goes with execution, even if it is tested on the advice process. You are very unlikely to be sued for advising against a transfer – just as you won’t be for failing to point out that anyone with a DB benefit ought to consider transferring it in present circumstances. There is no logic to this. It is a bias both within the FCA rules and the Financial Ombudsman Service based on the old concept that financial services are less service and more product sales. The scale of any award against you will be based on putting the client back in the position they were – or its financial equivalent since rejoining the DB scheme is not an option. Hence the size of the potential liability is a function of the amount transferred and market risks impacting it. In Con Keating’s analogy, it is the insurance premium paid by all who need the cover, i.e. transferors, any of whom could claim, not just the ones who do.
In our case, because we do robustly enforce the value of the advice process independently of any transaction, as for all financial planning, we do not need to charge a high contingent fee. The intention of the FCA proposals to make the planning underpinning a transfer holistic may have the effect that more advisers enforce a fee for planning. But it is likely still to leave a contingent element. Rightly so.