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The trouble with replacement business

Why consolidation and centralised investment propositions are making it harder for advisers to decide whether to move products

Clients rarely come to advisers with a blank slate. They are likely to have some combination of legacy pensions, maybe from multiple jobs or private pots, Isas, trusts, asset wealth and other investments.

For advisers, weighing up the costs of moving products with the benefits of a better solution can be a tough decision to make.

Market dynamics are making this decision even more difficult. Consolidation is concentrating advisers in fewer firms, where a restricted proposition is the default one, more and more independent advisers are using some form of centralised investment proposition to standardise investments, and legacy platforms continue to pose administration difficulties.

Regulatory rumbles

In 2017, the FCA conducted a review of investment advisory firms’ practices when acquiring clients from other businesses. This included the suitability of replacement business recommendations, and whether the needs of individual clients were being appropriately considered when recommendations to transfer or switch investments were made. The FCA concluded that its testing of replacement business “did not indicate widespread common themes of unsuitability”.

However, the regulator did identify individual areas requiring improvement at many of the firms it assessed.

These included where adviser remuneration was calculated partly in line with the level of initial adviser charges generated for replacement business, running the risk of unsuitable advice. The FCA also noted many firms did not have standardised policies when it came to replacement business charging, which was left to the discretion of the individual adviser. It added that “some firms were not always clear on whether a charge will apply if a recommendation is made to the client to withdraw from a current investment and invest in a different investment product”.

The FCA says it expects firms to carry out a cost comparison when switching to new investments, including the impact of a contingent initial charge for transferring.

Tenet senior technical services consultant Mike Dowsett says the network now has specific policies on fund switching and replacement business, has produced guidance for advisers on when a transfer into a CIP might be appropriate, and encourages advisers to use a reduction-in-yield comparison tool to conduct a full cost comparison between the existing solution and a CIP solution.

He says: “Previous guidance from the FCA on CIPs and replacement business has been very clear with regard to the dangers of shoehorning and recommending an investment portfolio purely because it is the firm’s default approach.

“Potential drivers that might lead to poor customer outcomes in relation to this could include convenience for the firm or desire to recommend a particular level of ongoing service. Careful design of the CIP can help to demonstrate suitability of any proposed recommendations to switch into the CIP investment solution. For example, the CIP solution should have a clearly defined target market, setting out the type of client for whom the CIP may be suitable for and, indeed, the circumstances where the CIP may be less suitable.”

Adviser view

Susan Hill
Director, Susan Hill Financial Planning

When I take an ongoing fee from a client, I include new and existing business. It’s more likely I feel a better platform exists than a better product.

I include that as part of the ongoing service, so I essentially take that on at my cost. I should tell clients more about that really; it’s advice that goes on my professional indemnity and all the rest.

The problem when moving funds with in specie rules is that it can be two, three or four weeks of not showing up. Re-registration is appalling.

For a month, you might not get adviser charging; the previous platform gives it away, it doesn’t want to pay me now, but the new platform can’t see it either, so I’m losing money now as well. It’s really hard but it’s in the client’s best interest.

Consolidator crunch time

Money Marketing has heard reports from three advisers, who have each had conversations with separate consolidators or national firms regarding takeovers, where they say acquisition earnouts would have been greater should replacement business have been moved into the preferred proposition of the acquiring firm.

Replacement business can also be affected by restrictive covenants. In many cases, where advisers leave firms, they are required to sign lock-ins for a period of time, guaranteeing they will not contact clients or move their investments elsewhere.

The most famous case to hit the headlines was back in 2012 when Towry launched legal action against Raymond James and seven former Edward Jones advisers for £6m in damages over alleged client solicitation.

The Advice Partnership from Prudential director Tom Hegarty says how his business charges non-Pru clients is something it is giving consideration to, in terms of when it is bringing new advisers into the partnership.

Hegarty says: “A lot of this is linked to the problem of succession planning. A lot of advisers will be leaving the industry in a couple of years.

“Professional indemnity is getting to the point where firms are looking at larger consolidators.

“They could go there for a number of years, move business across to their CIP, stay for a few years and buy out their business.”

Expert view

CIP research gives cause for surprise

When we did research in 2017, we were staggered at the proportion of business going into CIPs. We used an initial figure of 80 per cent of new business that would go into CIPs, but we should have used 100 per cent, because there were lots over 80.

Another question we asked was what would make you change your CIP, and the broad answer was nothing. Advisers felt they were independent investment experts, that they now understood it and were sold on it. The obvious question to ask is if you’ve changed it five times in the past five years, why is this time different?

There is a huge confirmation bias in putting people into your own proposition because it’s absolutely brilliant. The smaller the firm, the more likely they are to do that because, though they won’t like it, huge firms do see compliance as an issue and are much more careful about shoehorning.

It’s virtually impossible to move platforms now, but my own advice firm encashes then moves, and I think that’s right, because the market goes both ways and you can do it fairly quickly.

Most IFAs have four or five platforms in use. They actually use one or two; another one or two are OK to top up or run their models on – that’s fundamentally the issue – and for the others, you leave it there but never top up.

Most firms will do their utmost to move into their portfolios, but if you’re an aggregator, you will do pretty much anything.

It’s the economy stupid; if you have got your own platform and asset management, you only make money if people use it.

Clive Waller is managing director of CWC Research

The SJP way

The largest wealth manager in the country, St James’s Place, attempts to circumvent any issues by having an arrangement with Policy Services, which operates as a service company for advisers transitioning into the SJP Partnership.

SJP hosts two testimonials on a website page regarding the support this gives advisers. One is from Boag England Financial Planning’s Ian Boag, whose firm joined SJP in 2014, according to its FCA Register entry.

Boag writes: “When moving my business across to SJP, I had a huge back book of clients to think about. Policy Services has delivered on what it said it would and has done so admirably.”

The other comes from Masters Financial Planning’s Jonathan Masters, whose firm appears to have moved across to SJP in 2013. He writes: “As an IFA, you worry about the promises you have made to clients so, for me, Policy Services needed to work. Since moving to SJP, Policy Services has handled the novation entirely.”

Masters is the sole adviser at the firm – arguably making transition more straightforward – while Boag England appears to have three advisers.

Policy Services does have advisory permissions, including advising on a limited range of pension transfers (those with a guaranteed annuity rate, or defined contribution occupational schemes, but not defined benefit ones), according to its FCA Register record.

It has seven individuals listed as active, and has a number of previous trading names, including WhereIKeepMyMoney.Com, as well as Charitable Investors.

The 20 steps SJP advisers must go through before joining the firm:

Policy Services’ latest accounts show a £20.2m annual turnover and £1.5m gross profit – a 12 per cent increase. Directors’ remuneration was up 20 per cent.

The results state: “Although previously our sector was a very commission-based environment, we have seen a large swing towards adviser charge business models and this is reflected in the income that we receive.

“We have also been developing our services to increase the level of income we receive.”

Policy Services operates in a “competitive and small market”, the firm says, and also oversees its own advice business, Virtue Money. Its results state: “We have continued to invest resource and time into Virtue Money – our private client division – and have started to see some promising growth within this area of our business.”

A former SJP adviser says they decided not to use Policy Services due to how they understood it to work.

They understood that old contracts and non-SJP life policies would be managed under a letter of authority by Policy Services, operating as the adviser, which would then collect renewal fees and pass a percentage back to the adviser.   

An SJP spokesman says that when an IFA joins SJP, there is no requirement for clients to transfer their existing investments, and there are no specific charges incurred by clients for any investments they decide to move to it. The spokesman declined to comment on what proportion of SJP clients pay trail commissions to Policy Services.

The spokesman adds: “The process here is the same as it would be for any advisory firm – i.e. the product or investment may carry some form of charge or reduction in value/benefits if encashed or surrendered.”


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Damned if you do, damned of you don’t, typical UK regulation these days. What ever you do someone always finds fault. How many lower wealth clients are now stuck in poor policies as advisers unable or not willing to move them.

    I can remember meeting with Paul Flinn, Labour MP for Newport back in 2005. Pearl had not paid a bonus on their with profits for years and we suggested it was very unlikely they would the future. However, the illustration that HAD to be used to compare charges and returns suggested the clients would be better off remaining. At that time we were with a network that refused to agree any move. As we had suggested, these clients did not receive another bonus, they lost out massively. I was suggesting illustrations were not fit for purpose, but no one wanted to listen, they still don’t.

    As an adviser charges are important, but returns, stability are far more important. The current claims culture and regulation is making advisers jobs impossible. Three times to day on the radio, claims companies with no win no fee offerings suggesting if you have lost money on an investment, they could be able to get clients their money back.

    • Julian Stevens 13th May 2019 at 9:39 am

      The unknowable element when considering transferring a With Profits investment on which no reversionary bonuses have been declared for many years, particularly a closed fund, is what Terminal Bonus might be forthcoming at maturity. On some closed funds, it might (or equally might not) be huge. You just don’t know.

      I recently reviewed a client’s assortment of old CIS pension plans (now administered by Royal London) and every one was different in one way or another. The common theme was that bonus declarations on all of them had been suspended as long ago as 2002 ~ but, I EVENTUALLY managed to find out, these have been replaced by sort of managed fund accrual and whatever the value of that has become by the time each policy reaches its scheduled maturity date will be added as a sort of Terminal Bonus substitute. The trouble then was trying to get RL to disclose for each policy just what the value of its managed fund element is now and what its growth rate has been since 2002.

      After weeks of to-ing and fro-ing, RL just WOULD NOT provide this information, so it’s been impossible to tell the client whether the fund’s performance has been good, bad or indifferent, let alone what it’s currently worth.

      They were equally unwilling to provide any information on whether or not there might be a TB on bonuses declared up until 2002.

      In the end, the ONLY advice I could give was to stay put and hope for the best.

      Fortunately, the client is almost 60 years of age with only a few years to go ’til each policy’s scheduled vesting date, so a switch/transfer might well be difficult to justify anyway but it’s all deeply unsatisfactory and has cost me money even to get s far as I have.

      Then there’s the policy with GAR’s ~ are they likely to be worth hanging in for if the value of the policy is going nowhere or hardly anywhere? Who can tell when you can’t get RL to disclose any information on the policy’s Managed Fund element?

      This, of course, brings us to the government’s Pensions Dashboard project….

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