Money Marketing editor Justin Cash wrote an excellent piece recently, suggesting it was time to end contingent charging for defined benefit transfers.
I tweeted my agreement, only to be castigated by numerous advisers. I found many of the arguments to retain contingent charging weak at best; others quite ludicrous.
The more I look at the issue, the more convinced I become. I can see there are benefits to advisers, asset managers and platforms, but surely we must remain objective and consider the long-term outcome for the client.
The following may seem extreme but it is not all that ludicrous considering some of the stories I have heard. Imagine a bad adviser, so excited by the prospect of megabucks from a transfer that he celebrates with a few lunchtime drinks before writing to the client:
“Dear Mr Gulliver, it was a pleasure to meet this morning to discuss your pension transfer.
“You expressed concern about your ability to pay our fees, suggesting £500 would be your limit. I am delighted to say this does not present a problem, as we can work on a contingent charging basis. This means if you do not transfer out of your pension scheme, you will incur no fee. As you may know, this is how lawyers often work. It is sometimes called a ‘no foal, no fee’ basis.
“In law, the ultimate verdict on whether there is a case, and how much is awarded, comes down to the court. The great thing about DB transfers is that I am judge, jury and executioner. I am the sole arbiter as to whether you should transfer or not and will, of course, act in your best interest.
“I should tell you about my fees. Your transfer value is quoted at £500,000. Our initial fee will be 3 per cent of that, i.e. £15,000 plus VAT.
“You might wonder how we arrive at this figure. To be honest, we don’t really know what to charge. We have only been doing it since pension freedoms were introduced and have been told it is high-risk business.
“Our professional indemnity insurers are nervous you may sue us in the years to come for bad advice. So 3 per cent seems reasonable.
“Also, it was the amount we received in commission for introducing business before that was banned.
“Most of the work involved isn’t that complicated. Our paraplanner will be responsible. You can rely on him; he is a lot more qualified than me. After the transfer is made, we will be looking after your money. For this, we will make the reasonable charge of 0.75 per cent per annum.
“You intend to take the maximum tax-free cash of £125,000 (I agree; the round-the-world cruise looks splendid). Thus, our charge in year one on £375,000 will be £2,812.50 plus VAT.
“Have no worries; I am sure we will succeed in meeting your requirements. Your Adviser.”
I don’t expect you to take this too seriously. However, the core facts behind this letter relate to cases we are aware of.
Contingent charging creates an enormous potential bias and will result in bad advice – as the FCA realises.
Clive Waller is managing director of CWC Research