Solving the puzzle
Wrapping up a range of different products in an RDR context makes remuneration of providers and advisers a complex puzzle. Jenny Keefe untangles where revenue will be driven
Increasing funds under management may be the main attraction of corporate wraps to advisers. But an assets under management model may not sit well with the regulatory framework created by the Retail Distribution Review (RDR), warned delegates at last month’s Corporate Wrap Forum.
In a poll at the Forum, The Future of Corporate Wrap, delegates were unanimous in singling out increasing funds under management as the most significant business driver for providers launching corporate wraps.
But a funds under management model for advisers drew a sceptical response from advisers, including Jonathan Phillips, head of consultancy solutions at Bluefin, who cautioned the industry against “mob thinking”.
He said: “Everybody’s heading towards funds under management, whether they can make money out of it or not. Traditionally, we’ve probably just handed over the fund, but now we think that we can add value because we have our own views about investment and because we think we can understand the customer better. I think there are definitely some intermediaries who would be happy for providers just to do admin.”
“We’ve been seduced as an industry by funds under management. Everyone is doing corporate wrap and they are trying to make it look like it works, without necessarily asking any decent questions” Steve Herbert
Steve Herbert, head of benefits strategy at Origen, urged the industry to investigate the idea further. He said: “I’m really concerned about what I’ve seen in seminars a couple of times now. We’ve been seduced as an industry by funds under management. Everyone is doing corporate wrap and they are trying to make it look like it works, without necessarily asking any decent questions.”
Delegates also reflected that the RDR, the FSA’s shake-up of commission-based financial advice, would lead to big changes in the way business was transacted. Hewitt consultant Andy Cheseldine, said: “I think RDR is going to be interesting. It is very clear that the FSA is not going to let you simply take large chunks of fees out of funds. You have got to show that you’re adding some value. If you’re not adding value, you’re not going to get the revenue.”
Asked if advisers would push commission-based funds before the FSA pulls up the drawbridge in 2013, Phillips said that advisers were undoubtedly focused on commission. “If you chat to providers, they’ll tell you that even employee benefit consultants are writing an increasing amount of business on a commission basis.
“We don’t operate in a vacuum, we’ve got competition, and there is the reality on the ground that it’s not a great time for employers writing large cheques. If you think commission is right for the client and the client is willing to install a scheme with commission, I don’t see why you would wait. I don’t think that has anything to do with the RDR.”
“It is very clear that the FSA is not going to let you simply take large chunks of fees out of funds” Andy Cheseldine
Johnson Fleming co-founder Simon Fletcher said: “Employers that are very keen to move to corporate wrap will talk about funding options, whether it’s fee-based or commissions-based. Those who are driven by a desire to have the platform will go down the commission route earlier, others will have to wait.”
There was agreement that the amounts paid for corporate wrap would be low. Asked how much extra on top of the annual management charge advisers would expect clients to pay for corporate wrap, 14 per cent said it should be free. Damian Stancombe, head of corporate DC at Punter Southall, said: “You can access Moneymadeclear for nothing on the internet, so the starting point is zero, and you can work up from that.”
Phillips said advisers could charge extra for the wrap, but not much more: “It’s hard to say without seeing the employer and the pension scheme, but it’s going to be tight.”
The panel was split on how employers should pay for advisers’ services. Phillips said: “What we do is sit down with the clients and decide what they want to do. We’re more than happy to take a fee, or we would happily take the commission in a variety of ways; it depends how flexible the product is on remuneration. We don’t believe that taking a cheque for advice is superior to taking money from a product. They are both just mechanisms to get paid.”
But Herbert argued that corporate wrap lends itself to a fee. “Otherwise, advisers will be tempted to sell more pensions because that is where the biggest commission lies. I think wraps will sit more comfortably with employers and employees if they are paid for through fees,” he said.
“On the corporate wrap structure you create, if there is a whiff of cross-subsidy, it will be more difficult to offer variable charges” Roy Edie
Herbert also favoured charging for every product in the wrap. “My gut feeling is that adding basis points to products [to pay for advice] doesn’t really work. We’ve got a mismatch between how we take income from pensions and how we take income from other benefits. If we add a corporate wrap to an existing flex platform, we will end up with some products with commission on them and others without commission, which is a big mess. Advisers need money coming out of the products into our pockets for it to work. The RDR is going to have to allow us to charge for all the products.”
Barnett Waddingham associate Mark Futcher pointed out that flexible benefits have a licensing structure. He said: “Much like a flexible benefits package, wrap could have an implementation fee and, maybe, a licence fee per head.”
Other intermediaries argued that they could charge different rates for different products provided that they made their fees clear. Cheseldine said: “I’d prefer corporate wraps to start from a position where there isn’t any commission, but that isn’t where we are at the moment. In due course, there is no reason not to have general insurance in corporate wrap. It’s just part of flex and voluntary benefits. You should be able to have different terms on each product, so long as you disclose them. We are going to need different regimes on different kinds of products anyway. There are different guidelines on Isas, pensions, life assurance, long-term disability - virtually anything you do.”
Phillips said: “If you put in a group personal pension, flex and a group Isa, there’s no problem because they are different products. However, if you have different products that happen to use a platform from the same provider, it creates an enormous amount of trouble. Why can’t you charge for them differently? You can do it if you go to different providers, but you can’t if you go to a single provider.”
Herbert warned that the FSA or whoever takes over from it will worry about how intermediaries charge for the product. Cheseldine told the panel “we need to explain to them that they are idiots”.
There was a broad consensus that advisers could charge differently for some products if they offered additional advice. Futcher said: “If you’re providing a service on the pension, but not on the ISA, you will have to charge accordingly.”
Cheseldine pointed out that advisers already vary their charges depending on what the employees want. “Advisers take a basic charge of 1 per cent, and then, if an employee wants something highfalutin’, they pay a fixed fee for the extra service,” he said.
Roy Edie, senior consultant at Towers Watson said: “As long as you tie the charge to that service, though, it’s quite clear that there is a reason why the charge is higher. On the corporate wrap structure you create, if there is a whiff of cross-subsidy, it will be more difficult to offer variable charges.”
Steve Herbert, head of benefits strategy at Origen added: “You’ve got to explain different charges not just to employers, but to members. And they are going to be confused.”
In response to the question of why pension should always be the core of a corporate wrap, Futcher said: “I’m not saying it is, but I think this is the way providers are pricing up their platforms.”
“The more we tell people, and inform them about the longterm planning that they need to undertake, the more they will save” John Taylor
John Taylor, Scottish Widows’ market director of corporate pensions, said: “As a provider, it costs tens of millions of pounds to develop a corporate wrap and you need to recover that somehow. Either you can do it by adding a charge to the pension or you can levy higher charges on the other products. We’ve taken the view that it’s more transparent and visible to do it on pensions. You can make your choice on whether that’s a reasonable approach.”
Taylor also said that pensions are less profitable than Scottish Widows’ other products. “Corporate pensions have a very thin margin. By putting an extra charge on the corporate pension, you almost improve the margins to the point where you level the playing field with other products.”
Asked if Scottish Widows would allow an employer to pay a fixed or variable annual fee instead of a proportion of the funds under management, Taylor said: “In fact, our first client is doing that. We’re going live any time now with our first client and the employer is giving us an annual fee.”
Andy Cheseldine, consultant at Hewitt Associates, said of the provider’s charge: “If you take an average year on an investment platform, the employer might pay 5 to 15 basis points on the money in there. But you would look to get a discount of say 20 basis points from the provider, because you are aggregating all your money with them. It could be a minus number overall.”
Taylor said: “I think as an industry we sometimes forget what great value group pensions are, certainly since single charges came along. To be able to have investment, administration and all those sorts of services, at 35 basis points is fantastic. It’s certainly tough in terms of commission. Providers are earning a return on capital of about 10 per cent and the break-even period is about 10-15 years out. That’s not a particularly attractive shareholder investment at that level.”
Taylor also suggested that providers’ charges will become confusing. “There’s a single charge on a corporate pension at the moment. It’s quite easy to tell one provider from another, but with corporate wrap, the problem is we’re now looking across a broader range of products. If a provider’s leading with one cheap product, but its guidance points towards its more expensive products, that’s a different proposition,” he said.
Cheseldine added it was crucial that the provider was stable. “The argument to the employer is what you want is something that is consistent.
The worst possible scenario is that you put something in that then falls over the next year or after two or three years. Now the problem with that argument is that they may well say ’in that case don’t bother’,” he said.
Cheseldine said: “We are seeing more evidence that the more you educate workers about pensions savings, the less likely they are to put their own money in there. It’s an entirely rational decision: to put money somewhere else such as an Isa rather than put money away where you’re largely just deferring taxation and you can’t get your money for 30 or 40 years and then you have to buy an annuity. Okay, if there are matching contributions from an employer, that makes it more valuable, but just to put your own money in, a large proportion of the population are better off not doing it.”
But Taylor said: “I’m far from convinced that there will be less saving in aggregate. I think the more we tell people, and inform them about the long-term planning that they need to undertake, the more they will save. Whether it all goes into pensions is another matter. I’m pretty ambivalent about which tax wrapper it goes into, as long as people realise the need to save and use one of our products to do it.”
Cheseldine warned that corporate wrap could be a “money pit” for providers. “How many sustainable corporate wraps can exist? Providers will specialise, whether it’s risk, pensions or Sipps. Not every provider will have a corporate wrap, which will make life easier for those that do. But providers that do play will have to make sure they get a substantial part of the market - and at a profit.”
The RDR will make an already complex market even more so. Making a profit from corporate wrap will challenges and opportunities in equal measure to providers and advisers alike.