Al Rush asks the questions others duck. I suspect that this is a question that many of us have thought to ask, but never framed well.

IFA, do you consider putting a client into drawdown (DD) as high risk business, and therefore as worthy of a formal process as, say, a DB transfer? Do you regularly review DD rates etc? Is DD a miss-selling scandal in the making, would the absence of a DD file be worrying?

Ta.

— Rush (@exRAF_Al) December 21, 2021

The question drew comments from other financial advisers and solicited more information from Al about why the question was on his mind.

Let me add to my question. If a National IFA transferred someone out of a DB pension and then, at 55, needlessly facilitated max pcls with zero justification or records, for the money to sit in the bank for four years.. dodgy? @Gibson_XL @DavidPenneyPRW @dontdelay @fryer_nathan https://t.co/TFxtonuPsu

— Rush (@exRAF_Al) December 21, 2021

So let’s look at how the conversation progresses

Bit of all three I suspect. But activity with enormously harmful consequences.

— Rush (@exRAF_Al) December 21, 2021

Inevitably , the conversation moves on to consider advice on transfer values

A good adviser would give all the counter arguments and in many cases not recommend the transfer.

— David Penney (@DavidPenneyPRW) December 21, 2021

This blog could easily follow down that rabbit-hole, but I’m interested by Al’s original question. Advisers can charge a lot of money for advice on drawdown and charge again for managing the client’s funds and executing trades.

Infact the vertically integrated financial adviser is

1. Managing funds
2. Executing the drawdown
3. Advising on cashflow

For which he/she can be paid as much as 2% of the drawdown pot each year. The fees are generally tiered and reduce the bigger the pot size, but they typically run into thousands of pounds each year and Al’s question is asking what consitutes value for that money and begs the question, what if it’s proven value wasn’t achieved.

Duty of care.

The accusations of “order takering” levied at the un-named adviser in this case are  based partially on the adviser’s insouciance to Al’s questioning and partly on the outcome of the withdrawl (the money sitting in cash in the clien’t bank account). The client’s motivation for taking a large amount of cash out of the plan was the fear that he/she might not be in future.

This fear is ever present to people in lockdown and represents an ongoing worry that is quite the opposite of the purpose of retirement savings (which should be giving reaassurance). The HMRC are not going to give a blanket moratorium over the tax treatment of withdrawls from pots in drawdown so the “fiscal risk” of rules changing is one of the risks that an adviser needs to manage. The accusation is that rather than pushing back, the adviser did what the customer wanted. In other walks of life, acceding to a customer’s demands would be considered good practice – which is where the question of “duty of care” comes in.

But it is very hard to argue, that a client is wrong when looking to take a risk off the table. Many people feel that world stock markets are due a big correction, not just today, but everyday. Clients are entitle to decide that they’ve had enough of looking at the market performance each day and having their mood dictated to by whether numbers are in green or red.

If the adviser’s role is to keep a client invested unless the need for cash is aboslutely necessary, then this needs to be spelled out at outset and be part of the advisory contract. If a client insists on going against the advice then an adviser cannot be held responsible , but the client is now “insistent” and this needs to be recorded. This is the adviser’s protection in future years.

In my view, the advice generally offered is typically very valuable. I have had many discussions with advisers from Al Rush to the many people I speak to at SJP. I have spoken to advisers about how they justify their charges and invariably they talk not just of the value they have created, but of the harm they have prevented. You have only to look at the FCA’s retirement income study to see that most people who are advised are following a cashflow model that merits being called a “pension” or a strategy designed to preserve wealth. It is – let it be said – neither in the client’s or the adviser’s interest to have no money to manage. But the primary driver for most adviser’s is the execution of their duty of care and this is I imagine most advisers would wish be valued.

The non-advised corollary.

Another way of looking at the same question is to ask what happens when people try to manage retirement cashflows for themselves. Do we notice differences in behvior. We at AgeWage are working on a long-term project looking at the ouctomes of using various investment pathways to achieve different objectives.

We see different behaviors in people who are non-advised. Many take their money as quickly as they can , but more find it hard to take their money at all. Financial advisers play an important role in unlocking money from accounts and encouraging regular drawdown. Many people feel stuck in pensions they don’t know how to , or fear to access.

The non-advised appear to have many more pension pots than the advised and this is almost certainly because advisors involve themselves in combining pots into one big pot. This is both good for the client (in terms of manageability and economies of scale) and for the adviser, who can charge for the consolidation and ongoing management.

All of these things point towards the importance of advice since pensions were given their “freedoms”.

Levelling up (the capacity to care)

The gap between good advisory practice and the poor financial management of those in non-advised drawdown is much more of a problem than the poor advice mentioned at the top of this blog. That advisors discuss good and bad practice , suggests that self-regulation will see standards continue to improve. It seems inevitable that advice will become more valuable over time, as the likes of Rush, Penny and Gibson hone their skills and shame the advice of those who “don’t care”,

But I can currently see no levelling up for the non-advised, unless they find advisers for themselves and I see no prospect of mass market drawdown advice of the type advocated here, there isn’t the capacity to care.

The alternative fiduciary model is of course the pension’s trust where individuals are offered bulk solutions under the care of trutees. To date , this model has not been able to manage the extra work created by the pension freedoms and has rather lamely, referreed members to advisers or to Pensions Wise. It is beyond the capacity of non-commercial trustees to manage the drawdowns of thousands of members.

I suspect that this will change as more commercial trusts find themselves with more members with the same issues as those the IFAs are discussing on twitter.

Let’s hope that the solutions to managing the “nastiest hardest problem in finance”, (an income that lasts as long as we do), are available through commercial trusts, sooner rahter than later. For now, we should all follow the IFAs on twitter – they have much to teach us as we seek to level up!

Al Rush – one of many advisers I would trust with my money