I feel like singing hallelujah!

The FCA’s findings from their transfer review are brilliantly presented here by NMA’s Talya Mistry.Misiri

Here’s how she sums things up

The findings highlighted that less than 50% of advice was suitable. It said that several firms failed to collect sufficient information on clients’ personal circumstances, such as other pensions arrangements or retirement plans. Where this information was collected, firm did not fully consider it when making a recommendation, the regulator found.

What the FCA’s findings show is the fundamental preconceptions that have crept into wealth management about what people want from their savings

The FCA observed that the firms were relying on ‘generic objectives’ during fact finds with clients who wanted to transfer. This included using terms such as ‘flexibility’ or ‘increase pension’ without going into detail about what this meant to the client.

It said firms were not asking ‘whether the client is able or willing to take the risk required to achieve those objectives, or why they were prioritised ahead of the other needs and objectives of the client’.

Under a slogan separating “facts” and “myths” , Misiri details the specific preconceptions as misconceptions

The FCA said firms were putting too much emphasis on the inheritance tax benefits of a transfer.

In an eerie echo of the Brexit debate , Misiri looks at the philosophical basis used to recommend transfers

Firms were ‘basing a recommendation on the client’s objective to take control of their pension without exploring the reasons for this

The one-size fits all approach, continues with regards cash-flow planning

According to the FCA too many firms were not considering how much clients were spending or had coming in before making personal recommendations

The fundamental objective of any retirement plan is to ensure the money lasts as long as the client, but once again the FCA found advice wanting

….the regulator was concerned that advisers had not considered what happens when a client lives longer than expected after transferring their pension.

Advisers simply ploughed their furrow with little attempt to think about a client’s situation holistically

‘recommending a transfer because the client wanted immediate cash and income in retirement and to leave death benefits to their heirs without considering or demonstrating to the client the impact that achieving one objective may have on the client’s other objectives’

Meanwhile, the product into which their client’s money was to be transferred was simply not up to the job

The FCA found evidence that advisers did not look at how charges might affect a client’s income after a transfer.

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The FCA’s report also details inadequacies in the way that some financial advisers talk about risk and explain risks to clients.

I have seen many angry comments from advisers, but I have also read this wise council from Rory Percival.

Underpinning all this is a fundamental question of agency. Every criticism comes down to an adviser putting a sale before advice , a wealth management product before a pension and his or her own interests before a client’s.

Why this desire to sell products? The answer must be staring the FCA in the face, it is of course because without the product, there is no way for the adviser to get paid. The product is not just providing the initial fee for the advice (under what has become known as contingent charging), but usually it provides ongoing fees. Those ongoing fees can either be embedded in the product as investment management or collected by an advisory agreement. Occasionally fees will be paid to unregulated bodies (such as Celtic Wealth) as marketing allowances.

In all cases, the perverse consequences of contingent charging are plain to see. I jump for joy and shout hallelujah because I know that an evidence-based regulator has now got it.

With all these brilliant insights, it is impossible to think that the FCA can continue to tolerate contingent charging as the primary means by which a financial adviser is paid on transfers.

Contingent charging is the root of transfer evil. It turns advice into a sales process. It focusses the adviser’s mind not on the client’s objectives – but on the advisers. It leads to decision making which is designed to put the adviser first.

Evidence of the destructive power of contingent charging are everywhere. In the midst of a turbulent week in politics, Nick Smith had the chance to put to the Prime Minister the plight of one of his constituents, diddled out of his pension saving. The Prime Minister had this to say in parliament

‘I’m very sorry to hear about his constituent in relation to his pension and the actions of that financial adviser,’ ….. ‘I will ensure the Treasury looks at this issue with the FCA in these sorts of cases”.

The litany of sad stories emanating from Port Talbot and elsewhere repeats the same fundamental failing. It is a failure to prevent the conflict of interest between the client and the agent.

I will finish with the sad story of Richie Clayton who lost £169,000 by investing his transfer value into the predecessor of the Vega DFM into which so many Active Wealth clients were placed. Here’s his testimony to NMA

“There were 750 of us who all exited [took redundancy] at the same time. Celtic Wealth then began contacting people who had come out, all of whom had quite high sums in their pension funds, I had a contact from within the unions at the steelworks who recommended the company.

I was contacted several times by Celtic Wealth saying: “you need to sign up, you’ve come out, you won’t be protected. If Tata pull the plug on Europe, they’ll take your money, you won’t get a penny. If you die tomorrow, your wife, children won’t get anything, you need to do it as soon as possible. I spoke to a few people at the time and everything looked good. They didn’t tell me about the risks.’

So long as we continue to allow advice to be paid for on a contingent basis, stories like Richie’s will be repeated. We need to cut this cancer off before it spreads. Sadly with £38.6bn transferred out of DB last year alone, I fear we may be too late. Many people will have to live with the consequences of what the FCA has found out – not just today, but for the rest of their lives.