Clive Waller: Contingent charging can only lead to bad advice

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.

Blog: Why DB transfer contingent charging won’t cut it

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.

Clive Waller: We must keep a close eye on vertical integration

“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.

Has time run out for contingent charging?

“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

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Comments

There are 16 comments at the moment, we would love to hear your opinion too.

  1. “If we conclude that a transfer is suitable and we transact the business for you our fee of £15,000 can be drawn from your transferred money. If, however, we conclude that a transfer is not suitable, I recommend an unsecured bank loan in order to pay our fee of £15,000.”

  2. The real question is whether contingent charging would turn a good and ethical adviser into your ‘bad adviser’.

    The evidence is questionable as it was with the same basic argument over commission.

    A bad adviser will find a way to be bad regardless of whether they charge a fee or work on a contingent basis.

    But let’s assume you are right. It must follow that any advice on a transfer cannot be followed up with the adviser being involved in managing the money after a transfer because that would be contingent on the decision to transfer. Any adviser is going to make more in the long run than they will ever make on the initial advice fee.

    Can you have it both ways?

  3. What an idiot. You do our industry a great disservice. Why not charge 6% because that was the commission on bonds and perhaps sleep with the guy’s wife just for good measure.

    A surgeon has contingent charging does he not? Are your costs and liabilities the same if the client stays in or leaves a DB scheme.
    You say the work is not complicated which further displays your ignorance.

    Yes there are some advisers who in the past have not acted in the best interests of the client and they to be weeded out but your comments are ridiculous as my answer.

  4. Clive, good headline to attract comment but, if you really believe it then, to avoid hypocrisy, you should set out your evidence to support this guaranteed poor consumer outcome.
    If you do not have such, what confidence can we have in you or your firm providing a comprehensive piece of research for us which I assume we would have to pay a fee for regardless?

    Is that any less morally dubious? Perhaps you should offer a complete refund if the research does not provide the answers that were required?

  5. I heard last night of an adviser who’d arranged a DPB transfer of £1m, put it all into the PruFund and is charging 1% p.a. On a visit, the FCA were somewhat keen for him to justify it.

  6. Therefore, all fee charging advisers are good, honest and put the Client interests first? Do me a favour, no wonder people like me are leaving the profession.
    Shame on you for casting such dispersions on people in our profession who work hard to give the correct advice to their clients.

  7. This akin to saying, paying cash for goods and services will only lead to defrauding HMRC and tax evasion

    Sure it does some of the time but I would argue, this would be a very small minority !

    Next time you pay cash for anything Mr Waller be honest and call the cash taker, a tax fraudster and can you see evidence he declares all their cash takings to HMRC …..hope you have a good dentist ? I’m lead be believe most take a credit card …

  8. 1. Good advice is good advice, however it is paid for.
    2. Bad advice is bad advice, however it is paid for.
    3. Conflicts of interest need to be managed.

    How advice is paid for shouldn’t affect the advice (and if it does, then point 3 has not worked).

    The ongoing narrative that clients seeking advice are like ‘lambs to the slaughter’ if contingent charging is used does a disservice to the profession at large. It’s also missing the (well made) point above that, lets not forget the benefit of larger AUM for firms.

    The BSPS issue is still fresh and unravelling but I wonder, of those who have issues, how much of it is the advice to transfer out and how much is, in fact, what they were put into? My gut feel is that it may well be more of the latter rather than the former.

    In the words of the FCA, bad advice is bad advice, however it’s paid and as Grey Area says, if doors are closed in one respect, there will be those who will find a work around.

    Hell, people are still earning commissions on UCIS (AFAIK) and RDR was years ago!

    In a very pertinent tweet I saw yesterday (the gist being)… “Regulation is there to make rules for those who ignore them”.

    The issue is much more nuanced than this unfortunately, but reverting to my opening points, if any conflicts of interest are managed and advice is ‘good’, there should be no issue even where contingent charging is used (and if it isn’t, conflicts still exist in any case).

  9. A more balanced opinion would be that CC raises a conflict of interest which some find harder to resist than others.

    Of the cases it’s examined, the FCA has questioned the suitability of something like half, though we don’t know what proportion of those are down to obvious bias driven by CC or that they’ve just fallen short of the FCA’s required standards, irrespective of the basis of charging. If we did, a sweeping statement that CC automatically leads to conflicted advice might be easier to justify.

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