This is the last of eight blogs I’ve written in response to the Work and Pensions Select Committee’s inquiry into Pension Transparency.
Today’s exam question is
“Do pension customers get value for money from financial advisers?”
and the quick answer is “rather more than they used to, but not as much as they should”
Pensions advice is a 60 year war over value and money
If the Horrible Histories did “pensions financial advice”, these would be the memorable dates
1961 Mark Weinberg set up Abbey Life and Unit Linking
1971 Mark Weinburg set up, Hambro Life and 20 years later St James Place). The direct Salesforce replaced the man from the Pru.
1988 – A-day; pensions advice was polarised between independent advisers and direct salespeople
2001 – Government started regulating product charges with Stakeholder Pensions
2012 – Government completed Retail Distribution Review and stopped commission
2014 – Pension Freedoms allowed pensions to be considered as wealth management
I was a regulated adviser from 1984 to 2005 and ran my own practice for most of that time. I’ve worked with great advisers (John Ottensooser) and some crooks. I don’t paint myself as a saint but I know my way around.
I would characterise the past 60 years as a battle between advisers and consumers for the ownership of value and the extraction of money.
Financial advice polarised between financial planning (IFA) and wealth management (WM)
My experience of financial advisers today is split between a few financial planners and rather more who help manage wealth.
In general those who provide financial planning are struggling to make a living, earn their money from transparent fees and are doing a great job.
Those who provide wealth management are living on easy street, being paid from the funds on which they advise with little margin pressure.
It would be wrong to polarise the groups, wealth management subsidises financial planning and many advisers have feet in both camps.
The perversion of best advice by adviser remuneration
You have to be “senior” to remember the concept of “best advice” but there was a time when people aspired to do the best for their customer and to charge appropriately.
But the concept was always challenged by the difficulty advisers had in getting paid. The system of commissions that was pretty well universal before the RDR in 2012, was recognised as conflicting advisers who were seen to be favouring solutions that paid them the most.
Six years after the implementation of RDR – I read an article in the IFA trade press, innocuously entitled Sipps overtake annuities and drawdown as advisers’ most-wanted platform product.
The article reports findings of a survey of IFAs and the products and platforms they choose.
It shows full Sipps have risen to the top of financial adviser wish lists for the most desired products on platforms as demand for annuities and income drawdown recedes.
A quarter of respondents say they would most like to see full Sipps and other complex pension products on platforms
What is driving this thirst for complex pension products and the platforms to launch them?
The top three satisfaction drivers on main platforms are adviser remuneration features, reporting capability and retirement advice/services
Note the absence of this report of anything to do with “better outcomes for customers”.
Complexity is only beautiful in an asymmetrical world
The FCA in their recent work on the platforms that advisers now use – noted how since RDR – complexity had increased. Here is their pictogram of the Pre RDR advised platform
and here is the new value chain.
The second “solution” is what Money Marketing calls a complex pension product. The FCA’s point is that non-workplace pensions have morphed into considerably more complex products which deliver “adviser remuneration features, reporting capability and retirement advice/services“.
In practice, the retirement advice/services piece is (cash flow modelling) is paid for by directly charged “adviser” charges and indirectly by profit sharing on the annual management charges from the other participants. The new SIPP has become a fully bundled product that drives the Wealth Managers business.
It is often hard to work out the “money” element. Steelworkers who signed up for SIPPs through Active Wealth Management were able to quote disclosed charges for one or maybe two of the boxes, but quite unable to work out the total cost of the services of the Fund Administrators (Gallium), DFM (Vega) , Fund Manager (Newscape) let alone the costs of the ultimate asset managers within the Newscape fund.
This may be a notorious case and not typical, but the problem of complex relationships between multiple agents is endemic in the complex pension products being used today by wealth managers. The complexity is making it all but impossible for ordinary investors to assess what they are paying or indeed getting for their money.
The solution is so complex that only the adviser understands it. This causes precisely the asymmetry of information between buyer/seller, that has been noted by campaigners for transparency as the “value destroyer”
The Wealth Managers must simplify what they are doing .
There are simpler solutions out there. The article mentions annuity and drawdown. These are relatively simply products with little opportunity for wealth managers.
I need to explain that most pension savings product allow people to draw cash from them using the various options introduced by the pension freedoms.
These options are fit for the purpose of most people, but they are ignored.
The steelworkers in Port Talbot almost all had access to workplace pensions from which they could have drawn down at less than 10% of the costs of the complex SIPPs that were set up for them. But these workplace pensions did not have the convenience of “adviser remuneration features, reporting capability and retirement advice/services”.
Hope for the future
The past twelve months have seen a polarisation between wealth managers happy to live off the massive inflows of wealth from defined benefit schemes and well funded DC pensions, and those who consider themselves financial planners.
The events in South Wales typify this polarisation. It is good to see that a healthy proportion of senior advisers have demonstrated the highest ethical standards in the restitution work being done for steelworkers and others and no compliments are too high for those who have given their time freely to “Chive” (the restitution and guidance service set up by Al Rush).
Nevertheless, it is now clear that the majority of the £36.8bn that transferred out of occupational pensions last year, found its way into complex SIPP products and that a good proportion of it is not offering Sipp holders value for money.
The curse of product bias has returned, except now the bias is into such complex products that sometimes even the advisers lose touch with the money spent on intermediation.
The hope for the future is with Chive and with the FCA and tPR who are beginning to get to grips with the advisory problem. If we are to move forward in hope, it is because of the professionalism of the new model of advisers who are better qualified and better intentioned than at any time since 1961. But that means ridding ourselves of the recidivist practices that are dragging us back into the bad days – pre RD – when products perverted advice.