BSPS was always going to cause collateral damage. The aftershocks of the £3bn that left the scheme during “Time to Choose” are now being felt by financial advisers as the testimonies in this article show.
The advisers are talking of their struggle to get professional indemnity insurance to continue offering advice on whether to take a cash equivalent transfer value from a DB Scheme.
One adviser, commenting on Darren Cooke’s testimony writes.
This is the biggest threat to small firms since I’ve been in this business. I think lots of companies will be for sale this year which will drive business sale prices down. Some might just have to close the firm down and see if they get another firm to take on their clients. The Regulator should have seen this coming, it was an easy way for unscrupulous firms to make a quick buck and clear to see.
The comment is insightful on a number of levels. Firstly it shows how vulnerable IFA businesses are to reputational issues such as the PR from Port Talbot. Then it shows how dependent many IFAs have become on the revenue streams from transfer business and finally it demonstrates how reliant IFAs are on the FCA to maintain standards among them.
Underpinning the comment is the dilemma at the heart any business model, to what extent do you compromise on long-term value to receive short term profit. This conflict can be expressed in many ways but let’s focus on the matter in hand, that around half of the transfers that happened over the last three years , were not satisfactorily advised on – according to the FCA.
In the short term, grabbing assets into a vertically integrated advisory model at £400k a pop is a win- win -win. The adviser gets a fee for implementation which is paid for from a tax-exempt fund without VAT and with zero impact on the client’s bank balance.
The adviser gets ongoing advisory revenues on the money and possible a split of the management fees if the firm are involved in managing the funds. These fees too are from a tax exempt fund and not liable to VAT. They are not – under contingent charging , met from the client’s bank account, they are a charge on retirement income.
It is quite possible to earn 2% upfront (£8,000) and 2% pa on the £400,000 – the average CETV from BSPS. These fees are payable to retirement and – should the client choose to drawdown on an advisory contract using the IFA’s fund management service, they become part of the advisory firm’s embedded value.
What is happening is that the retirement funds of clients are funding the retirement of advisers.
This is the conflict that many IFAs face and it is only now, as FOS limits ramp up and PI shoots through the roof that the impact of those conflicts is being felt.
When will IFAs admit defeat?
It is all very well blaming the FCA for not seeing this coming. But the conflicts created by contingent charging on transfers were clear to see from day one.
Even now IFAs cannot admit defeat, that is because so much of the embedded value of their businesses is dependent on the recurring income on money transferred from DB plans and the positive cashflows of easy transfer fees, still sitting on the P/L.
Many IFAs are now caught on the horns of a dilemma, they have built businesses which are now so expensive to insure that the embedded value is falling and so are cashflows.
But admitting that contingent charging was wrong in the first place is a much wider issue. Many of the insurers and SIPP providers who provide the wrappers and platforms to which DB wealth has now transferred, are also in danger.
When will contingent charging be banned?
This is such a sensitive issue, that most providers won’t even talk about it. The IGC reports published this month make no mention of transfers. There are shareholders who should be asking questions about how much of the recent revenue successes of quoted firms such as Quilter, SJP, Prudential, Royal London and Aviva are DB transfer related.
Some insurers – such as Aviva have openly stated that contingent charging should be banned.
But the general public comment from advisers and product providers is that contingent chugging should stay. Steve Webb has out strongly against banning contingent charges. The matter has been discussed by Paul Lewis. The matter has been debated in parliament.
I suspect that the only thing that will stop the talking and get a ban in place would be a change of Government. There is too much of this Government in the wealth management industry (Rees-Mogg down) for the FCA to ban contingent charging. The FCA is conflicted too.
So contingent charging will continue to be justified as the way to bridge the advice gap where the cash-poor can become cash rich by spending vast sums dismantling their pensions- largely for the benefit of those who advise them.
The FCA will continue to consult.
I will continue to bang on about this and those reading this blog will continue to feel uncomfortable that I do.
Contingent charging is the root of all transfer evil. If the IFAs really want the FCA to lead, they should admit defeat, but they won’t – they’ll hang on in hope that somehow things will get better.