Many years ago I wrote an article on the trend of paying full initial commission on an indemnity basis with no claw-back on executive pension plans. This exposed the risk to major insurers that plans would not run long enough to cover commission paid, let alone their costs.
I recall one senior individual at a major firm cancel the accelerated commission plan it had brought in prior to his arrival. The use of embedded value accounting has always left insurers vulnerable as it ignores basic logic. When plans were running for under five years on average, assuming seven years of charges in year one smacks of irresponsibility.
So the news the FCA intends to limit exit charges to 1 per cent from next year will be problematic to many insurers, both the living and the zombies.
Another bit of news that made me think recently was the sale of Axa Wealth to Phoenix. Now, I assume that sale will include the Family Suntrust plans that, by their very nature, require intensive servicing – not something Phoenix has ever delivered in my knowledge. I would hope the FCA would be imposing a no worse than standard of service on such acquirers but I am not holding my breath.
When an adviser recommends drawdown the charging structure needs to support ongoing reviews, as the regulator has indicated. When providers lose the ability to apply exit charges in excess of 1 per cent, something will have to give and service will often be the casualty. But when service is already dreadful how will that even be possible?
The more difficult it becomes to obtain ongoing updates and permutations from a provider the easier it is to justify a switch. That is when the spiral starts and at some point one of the zombie companies will crash. I can see mergers of necessity gathering pace.
For clients with substantive penalties in place, waiting for next year makes sense. But the get out clause of market value reduction needs to be monitored and the regulator needs to be involved in its determination.
Some have suggested enhanced allocations will unjustly benefit those who leave when the cap arrives but that is life. Things change. Having taken on clients who were locked into contracts with poor investment options and massive exit penalties (most being due to commission paid) this is a great moment. I am just sorry the FCA has not proposed removing exit penalties but perhaps in time it will.
I am sure some will suggest what I am hoping for is unfair on the providers but quite frankly they need to suck it up. Transparency in charges is not going to go away. It is a trend that is gathering pace and no one is exempt.
We all need to look at how we reduce costs if we are to hold on to the profit levels that firms benefit from at present. Just as the cost at exit is being controlled, the cost of entry wont be far behind.
Robert Reid is director at The Ideas Lab