Firstly an apology, some of my readers yesterday, considered the analogy between the fate of Syrian cities and UK pension schemes distasteful. I write a lot, I don’t always get it right – I don’t mean to offend- but sometimes I will. Here’s a picture of a Lamborghini to cheer us all up.
I was at Malcolm Small’s funeral yesterday, walking to the crematorium I thought how little Malcolm would have thought of the FCA’s proposed interventions; I was walking with a business colleague of Malcolm’s who is CEO of one of the big fund platforms – big winners from the shift of assets from institutional from wealth management. He told me that the removal of the right to charge contingently – would be akin to RDR2, threatening the vertically integrated advisory model itself.
I agree. That model is under existential threat, but not just from the FCA’s challenge to the transfer market. The Asset Management Market Review and the CMA’s subsequent investigation of investment consultants points to the same conflicts of interest.
Time for us to come clean on RDR
The public was told , when the Retail Distribution Review was implement over 5 years ago, that the advisers would no longer be rewarded from the products they advised upon. At a recent Dentons seminar, Michelle Cracknell cited an example of an adviser refusing to act for a client on a transfer unless the money was directed at a discretionary fund managed by the adviser. I read the same in a number of submissions at a recent IFA award event, at which I was a judge.
Rather than give whole of market advice on investment options, advisers seem to be operating to a commercial model that focusses on creating an ongoing annuity stream for the adviser’s business. This is – to my mind – precisely what the RDR sort to prevent.
The inherent bias that has crept back into the system – call it contingent (or conditional) charging, call it vertical integration – looks like commission to the man or woman in the street. If it looks, feel and smells like commission – it is commission – whatever you call it.
It is time for us to come clean on RDR and on independence, if advisory businesses are dependent on assets under advice and are rewarded for asset gathering, then they are not independent financial advisers. They may be regulated by the FCA but they cannot claim to be acting for the client, they are acting for their business. People need to know this and accept that they are being sold a solution – in the matter in hand – the transfer of pension rights to an asset management service.
At the moment, they are being sold something different, people are expecting an IFA to advise them independently of the solution.
Putting separation between advice and product
I was talking to a friend of mine who worked for Tideway as an intern in the summer of 2013 and was surprised to find that the model he was working on back then was to evolve into what Tideway offer today (see Pete Doherty’s article on this blog). Doherty is a smart business man, he could see then, what the FCA and tPR seem to be waking up to today, that it is impossible to operate as an adviser and manage funds without justifying the conflict of interest. Docherty’s article is an excellent articulation of how conflicts can be justified but it depends on our suspending disbelief in inherent risks that the RDR sought to mitigate.
I stand on the other side of that argument, and I call for the immediate cessation of the practice of contingent pricing.
I also call on the large consultancies to split their fiduciary management businesses from their investment consultancies. Let me remind you of that leaked memo from Mercer to its staff.
“We want to protect our existing … revenue as much as possible,” .
“Accordingly we do not intend to advertise the new lower fees to existing members and we don’t want to make it easy for them to [a] find out about the new lower fees and [b] access them.”
If you are claiming to be acting for your “existing members” but in practice “protecting your existing revenues” then it is a commercial imperative that you manage these kind of business problems in your favour and against the interests of those you claim to act for.
Until we separate advice and product, we cannot have a transparent market and that goes as much for the world of independent investment consultants as it does for independent financial advisers.
There is an argument , much loved of those who argue for vertical integration, that “the people have spoken”. It works on the fallacious logic that because a business model is successful, it is legitimised. We – the public – have proved again and again that in matters financial – especially matters involving long-term investments, we are poor buyers. Here is the OFT in 2014.
Ironically, one of the strongest parts of the retirement market is now the workplace pension. I say “ironically”, because it is a financial solution studiously ignored by those who offer contingent fees as a means to pay for transfer advice. I would like the FCA to do a spot check on the advisers it is currently monitoring as Pension Transfer Specialists and look for evidence of advice on a transfer into NEST or any other workplace pension plan into which their client may be saving.
This is a conflict between consumer and provider
Let us not pretend that those who are providing commoditised advice to transfer on a contingent fee basis are IFAs, they are not, they are providers of a transactional service that turns a pension to a pot.
So these advisers are really providers and the pots they manage are only “pensions” in that they can be adapted to draw down through regular capital redemptions, a string of regular payments.
The system is incentivised by tax-relief, which was originally granted because people were saving to buy a pension (an annuity). That tax-relief is enjoyed by savers but paid for by all tax-payers. That tax-relief was not granted for the purposes of wealth preservation, for inheritance tax mitigation or any of the other arguments put forward by wealth managers to justify their ad valorem fees.
It was granted so that people could insure against living too long and provide themselves with a wage for life. That is precisely what a final salary scheme or career average pension scheme does. That is not what a wealth management service does, try as it might to convince us otherwise.
If we are comfortable to incentivise wealth management- then let’s be clear that is what we are doing. Let us have a Regulator who actively promotes contingent charging because the Regulator believes in neutrality and in people swapping pots for pensions (if that’s what they want to do).
But the clear feedback that the FCA got through CP17/16 was that was not what was good for people. In 53% of overall cases (51% in the recent work on BSPS cases), the FCA were unsure of the validity of the advice and could see no clear reason to transfer. They saw no reason to suppose those advised “special”.
That suggests, what the OFT told us in 2014, that in matters to do with workplace pensions, we – the public – don’t know what we are doing.
Handing us the keys to the Lamborghini, sounds a recipe for disaster to me.
If you want to see my short video on how I think we got here, press this link to New Model Adviser’s website.