What price advice?
The Retail Distribution Review will put pressure on funding for advice just when automatic
enrolment creates greater demand for it. Dido Sandler reports
High deductions from first year’s contributions to pay for consultancy charges will not succeed because they are unfair on low earners, said advisers at the Corporate Adviser Closing the Advice Gap industry forum last month.
The consensus view of delegates was in marked contrast to the vision of consultancy charging put forward by some advisers at a different event a month earlier, where fees of between £200 and £500 per member were proposed as being potentially chargeable, regardless of salary.
Delegates at the Closing the Advice Gap forum branded even a charge of £200 as potentially unfair and liable to be shot out of the water by cheaper competition. Glenn Thomas, managing director of Jelf Group said these numbers would penalise the low paid. “If you’ve got an employee who’s auto-enrolled with a contribution of £100 a year, is £200 fair for that employee?” he said.
Jonathan Phillips, director of Bluefin, said: “You can’t take a significant sum out of first year’s contribution. It’s not viable. I’d go nuts if someone did that to me. If the average employee moves companies every five or six years, and they have perhaps 50 per cent of pension deducted every first contribution year, the impact would be untenable. A longer term, smaller deduction to pay for education and other employees would be more acceptable.”
Ultimately it will be the market itself that will limit the level of charges, said Thomas. “For any decent sized scheme generally there is going to be two or three firms involved pitching for it. And I’m pretty sure if anyone round this table finds someone charging 100 per cent of first year’s contribution and providing very limited service, they will be very quick to point that out to the employer.”
Advisers are bracing themselves for a challenging period, as pressure on revenues caused by the arrival of the Retail Distribution Review coincides with a huge upswing in demand for advice, assistance and information on pensions when employers’ auto-enrolment obligations start to take effect.
Just as the brave new RDR world is bedding in, we are likely to see a massive 50 per cent increase in the numbers of people saving in contract-based environments, according to calculations by Scottish Widows. This at a time when there are likely to be dwindling resources to pay for the escalating demand, with the abolition of commission-based distribution.
Advisers already at or near capacity have to figure out how to cater for additional demand, provide value to clients and make money under the new constraints. And that will mean looking at new, more efficient ways to talk to employees, with technology seen not quite as a panacea, but certainly a key tool.
Things won’t change straightaway - existing contracts will continue under their current charging systems. Stuart Gray, founder and chief executive of Portus Consulting, doesn’t expect an immediate shift in the way business is conducted, as most of the new business his company wins already has a pension in place with a commission structure, and he isn’t interested in the hitherto-unpensioned market, at which Nest (the new Government-sponsored plain vanilla scheme) will be targeted. But eventually, as new contracts come into being, there will be less money around to implement them. Employers and their staff will see charges billed explicitly, probably in the first year, and they may not like what they see and be resistant to paying. A marked contrast to today’s world where charges are deducted virtually unnoticed from contributions throughout the lifetime of scheme membership.
Some consultants do not appear over-troubled by the changes. Mark Pemberthy, projects director, DC consulting at JLT Benefit Solutions, said: “Consultancy charging does make putting in a pension product slightly more difficult. But in reality if you’ve still got a compelling set of solutions and services that you can show add value within the workplace, then the employer as a buyer will still be comfortable buying them.”
The consensus among forum members was employers with commission-based schemes are significantly more likely to opt for consultancy charging, rather than paying fees themselves, in the future.
Advisers are either keeping their cards close to their chests, or genuinely don’t know how consultancy charging will work - by fixed fee per member, percentage of contributions or percentage of fund, or a “mix and match” - a combination of two or all three of these, as no strong opinions were ventured on the subject. Nor would anyone commit a view on whether advisers will require their remuneration from members upfront, at the end of the first year, or later. Pemberthy expected how contracts are financed will be dictated to a large extent by first movers in the market. He says his own company shareholders expect profitability not just over the longer term.
Iain Chadwick, senior consultant at Johnson Fleming suggested the first month’s contribution could go on charges. Pemberthy meanwhile argued charges should never reach 50 or 100 per cent of first year’s contributions as auto-enrolment takes away the need for expensive face-to-face advice to persuade workers to join. Gray said even 10 per cent of first year contributions is way too high.
“You can’t take a significant sum out of first year’s contribution. It’s not viable. I’d go nuts if someone did that to me”
Even though it costs the same amount to enrol and communicate with a high earner as someone on the shop floor, Pemberthy expected the current system that sees cross-subsidies between these groups to continue. If not, the impact on the lower paid will be so severe as to be unattractive to employers. He envisaged that charges will normally remain proportionate to what people earn, and pointed out this is more important in companies where there are broadly disparate pay bands.
Panellists also recognised the danger negative press coverage low-paid workers ’fleeced of their cash’ post 2012 might generate.
Meanwhile providers are playing their own poker game, around decency levels. John Taylor, marketing director, corporate pensions, at Scottish Widows, says his company could impose caps on what advisers might charge, but they’ll only disclose the actual numbers towards the end of next year.
Forum advisers at the event were accepting of providers’ desire to impose decency caps. As Thomas noted, providers have more to lose in term of reputation and brand damage than wayward adviser firms.
Phillips said the industry has created a particularly cost-driven environment, and must live with it. He says there is pressure to provide a low-cost, technology solution that obviates the need for expensive human time, or the likes of Hargreaves Lansdown will come in and do it instead.
But Chadwick said if you can show value this should mitigate the cost argument. He said: “The service and value are what actually matter to people. Even the regulator doesn’t talk about the bare price. It talks about delivering the right value within a scheme.”
Gray said advisers will have to put more work into justifying the cost of the elements of their menu. “Substantiate what you’re charging. For me looking at it as a business and a purchaser, I want to understand the value equation of what I’m looking at. I don’t mind people making profit.”
Wealthier individuals with tax and financial planning issues aren’t a problem, and this market will continue to be fought over. He said: The major challenge is for the mass population who at the moment are reasonably well supported. And that will drop away. How do they then get an interaction with somebody from the profession without physically paying for it?”
Delegates said part of the solution is segmenting the client base. Having a basic core commoditised level of service, with desk-based advice, perhaps through a portal available to the masses, with more individual, complex advice reserved for higher net worths who need it, and are able and willing to pay.
Taylor suggested in future there could be number of employers adopting a two-tier approach, offering private provision with advice and information supplied by the advisory community for some, and a more basic Nest arrangement for others. Most of the Forum felt this would have a limited appeal, with 76 per cent of delegates saying less than 20 per cent of their clients would offer a Nest/private sector hybrid.
Phillips said such arrangements would depend on the culture and structure of the company. If there’s a higher wage control centre and lots of people working in the retail or hotel industry elsewhere, then this sort of two-level set-up could work. But it would be difficult to segment in other concerns, where the pension scheme is branded in the company’s livery and communicated as an integral part of rewards by the HR director.
Thomas flagged a danger here, that by turning away the Nest section the industry risks losing the higher income Nest members as well, especially if the Government abandons limits on transfers and the £3,600 annual contributions cap. Although advisers don’t want to compete in the Nest market - targeting rather the benefit-rich - the government sponsored scheme will act as a baseline for the broader market, in the same way as stakeholder pricing did, even though stakeholder itself was a complete failure.
At 50 basis points, Gray said Nest is expensive. Higher contribution levels means private providers can offer a richer product proposition, and that, says Taylor, is a compelling argument for the employer. Most forum members said richer private sector offerings could command higher charges than Nest, with 38 per cent saying 20bps more would be acceptable, and everyone saying up to 50bps would be acceptable. More than 50bps was not considered acceptable by anybody, however.
Adviser delegates were relaxed about the increasing challenge from another direction - insurance companies’ direct operations.
Paul Conroy, corporate sales executive at Lorica Consulting, said: “Competition’s always going to be there. It’s healthy for it to be there. And it’s down to us to differentiate ourselves about the services and the value-added we provide.”
“Competition’s always going to be there. It’s healthy for it to be there. It’s down to us to differentiate ourselves about the services and the value-added we provide”
Phillips spoke of direct competition with relish. He said: “If you’re in a pitch and you find you’re down to the last two - you and the insurance company - you’d probably feel good about your chances.”
Pemberthy said consultancies can offer a superior product to the insurers’ direct offering in a number of ways - communication, investment, governance and technology solutions. If cost is the decision driver, and the direct channel is undercutting the adviser, he’d have to hold hands up and walk away.
But insurers were warned that undercutting on price is a dangerous game. Thomas said the market will end up reacting against a particular provider. The majority of the pensions market is intermediated, so alienating the intermediaries would be short-sighted, he argued.
Advisers are unhappy when they have already got relationships with a corporate, and insurers try and muscle in to disintermediate the business. Providers, again, should take note.
It is clear the RDR is going to change the way adviser businesses operate if the advice gap is not to open further as a consequence of it. Efficiencies will be required and technology models developed. And of equal importance, more thinking will be needed on how advisers are to be remunerated if these valuable advisory services are to continue to be delivered.