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Retirement advice unplugged with Rory Percival

Author Image Mark Devlin Technical Manager
7 minutes read
Last updated on 31st Jul 2020

On the 23rd of June this year Vince Smith-Hughes held a webinar titled “Retirement advice unplugged with Rory Percival” where the former FCA Technical Specialist discussed the recent FCA policy statement and guidance consultation on DB transfers.

The discussion touched on other areas of retirement planning, and how advisers can futureproof their retirement advice. You can watch the recording of this here.

1,454 attended the webex and as you can imagine a lot of questions were posed. Whilst not all could be answered during the session we have compiled the top ten questions (and more importantly the answers) below;

Q - You can't complete a TVC or APTA under abridged advice, where do you stand in using cashflow planning?

A - You cannot do cashflow planning under abridged advice. This will be a simple form of advice to assess if the DB scheme meets the clients objectives, it's not a cut down version of a suitability seport. Therefore you should not do APTA, TVC or cashflow modelling.

It's really geared for those with cases that are easily identifiable as being not suitable to transfer, but you can't just tell clients that as it's regulated advice. So it's a pragmatic alternative to giving that advice without the full advice process being followed. It can't be a numbers based comparison, that would be in the APTA. A simple comparison using numbers from a straightforward cashflow modelling too though may be allowable although we may need clarification from the guidance consultation on this.

Q - Do you see any advantage to advisers who are active in providing DB advice in using Abridged Advice and How long should the abridged advice report be a single page? an email?

A - Abridged Advice will be an easy way to offer a service to these clients, offer reassurance and reduce the incidence where clients have to go through the full advice process (and incur its cost) to be told to stay in the scheme. Whilst full advice to advise the member to stay in the scheme is obviously fine but it does involve cross-subsidisation from these clients to the clients recommended to transfer. So it reduces this cross-subsidy if there are fewer of these cases by filtering out those that should stay in their scheme by triage and abridged advice.

In terms of the length of the abridged advice report I have not given it a great deal of thought. But I feel it will obviously shorter than a full report as you are not doing the full number analysis, so probably a single number of pages. So this should be comparatively short (maybe 4-5 pages) as you will be mainly explaining the context of the report and why remaining in the scheme is suitable, and if it’s unclear what their options ate. At its heart it, should still be personalised, but this should be fairly straight forward.

Q - What about clients who are simply unable to pay for advice, but have valid reasons to transfer out?

A - Unfortunately, they will not be able to access this area of advice. The only exceptions to the contingent charging ban are under the financial hardship and ill health rules. If they don’t qualify under that then they will not be able to access advice for DB transfers.

The FCA acknowledge this issue but take the view that the detriment caused in these situations where they keep the scheme will be minimal.

Q - Has the regulator set out what it feels are reasonable charges for DB work?

A - They detail in the paper that they continue to believe that £3,000 to £3,500 based on 20-25 hours of work on DB advice is a reasonable estimate. However, they have not put any charging cap in place.

Q - Can we still charge an hourly rate for DB work? i.e. tell them what our hourly rate is and offer a fixed fee alternative?

A - If you charge purely by the hour then no that's not going to work, because clearly there is a difference in the time it takes to recommend a transfer and all the work that goes around it where it goes etc. versus recommending somebody stays in the DB scheme. For purely hourly charging you are going to need to change your structure because you can't have that differential pricing structure.

If you use an hourly fee to calculate a fixed fee on the basis of how long it will to provide the advice on a fixed fee basis, that's fine. But that fixed fee would need to be the same for both clients who you recommend stay versus clients you recommend to transfer.

Q - Is it correct that we cannot charge for implementation if the advice is to transfer. If so, and the advice is to stay, how can we justify charging the same fee to the client?

A - Effectively yes, the cost is bundled and has to be the same whether the recommendation is to transfer or stay. Yes, this involves cross-subsidy between stay recommendations and transfer recommendations. The FCA considers this to be minimal.

Q - Can you cover the nuance in WPS advice where it appears that for DC advice the alternative scheme must be as suitable but for DB advice it must be more suitable. Why the difference?

A - In the DB side the workplace pension requirement is not that big a deal, the reason I say that is because with some very specific exemptions (plus some oddities) in general terms unless the clients have significant wealth, serious ill health or debt issues outside of those categories you're not really going to recommend a transfer until at the point or very shortly before they take benefits.

So if you are talking about the bulk of transfers being at or near retirement then WPS I would imagine in the main don't feature as being helpful for clients ( I imagine/understand that WPS are not particularly geared up for decumulation), which is the situation the client is now in or will be in soon.

Because they don't have the decumulation functionality/flexibility then WPS will not give them what they need. When it comes to non DB transfers there is a more material impact as a lot of clients potentially will be well away from retirement (still in the accumulation stage) so for those clients why not move to a WPS if it’s got a decent default fund, it's capped at 75bs (and a lot are less than that)? Whereas alternatives you may recommend will be 150bp 200bp depending on your proposition and your recommendation. So for the accumulation stage WPS will be more impactful for recommending where transfers go to.

Q - What about those HNW and UHNW clients that will never access the pension and want to ensure nominee/successor Drawdown - is WPS more suitable for those?

A - You would need to be able to demonstrate that any alternative to the WPS was more suitable than the WPS. If the WPS does not offer nominee/successors DD and you can clearly demonstrate that the client would not need to access the DB scheme then these reasons should suffice for using an alternative scheme.

Q - The policy statement alludes to the regulator having an aversion to ongoing advice. In what circumstances is ongoing advice appropriate?

A - There are specific concerns around the DB transfer market as a lot of DB transfer client are not the normal type of clients that advisers see. Their circumstances are a lot more straightforward, they are in their mid-life and still accumulating. They may just have a pension, maybe an ISA, mortgage and insurance need (and advice around that may be beneficial) but in terms of pensions and investments it's not complicated and it doesn't change significantly from year to year.

So I think it's those type of clients that probably don't need that level of ongoing. For clients at or close to retirement particularly those with greater levels of assets (upper end of mass affluent and upwards) as does seem to be the "normal" type of client for advisers, their circumstances are more nuanced and there is more scope for providing advice to clients on an ongoing basis.

Drawdown cases probably need more ongoing advice as they are more complicated in terms of income levels/sustainability etc. I have seen an increasing focus by the FCA in terms of what services you provide and the charges applying to those.

As you know the FCA is focused on value for money PROD is a big deal and it's central to what advisory firms do and central to how the FCA focus on supervision, so in a PROD context they will be looking at a sensible client bank analysis segmentation (maybe sub-segmentation process) and have you designed your own services (including ongoing) for the differing segments for clients and taken this into account for the charging structure that reflects those in a sensible value for money way.

And are you then delivering those services that you promised to the clients? So I think they are focused on ongoing, but they have flagged this up already.

Q - Clients say to a lot of advisers when they ask about wanting to look at transferring a DB and quite often the first response we would say is in an awful lot of cases it will not be suitable as you have a great guaranteed income for life etc etc. etc. Tthey come back and say but it’s my money and i want to take it, surely the FCA need to look into this, as we do get a lot of abuse or hassle from people when we suggest that it’s not right or that they shouldn't be looking at it yet. When if ever will the FCA allow clients to be leaders of their destiny and take responsibility for their decisions whether or not it goes against advisers advice?

A - Although the Pension Freedoms opened up additional options for clients, the onus for advice, and acting in the client’s best interests, remains with the adviser. 

I don’t anticipate rules changing so that the client decides what is suitable for them. This is also outwith the scope of the FCA as the definition of advice is defined in law (FSMA). Hence it would need to be Parliament that changed this.

Labelled Under:
Pensions and retirement

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