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Alistair Cunningham: Charging biases need addressing

Wingate Financial Planning director Alistair Cunningham We are all fallible humans, each with a complex set of biases influenced by our past experiences and other incentives available to us.

Contingent charging is an area where this bias is at its most extreme. But although it has been called for by some, I would not ban the model. The problem could well reduce but it would not be totally mitigated.

High-impact, irreversible decisions are where biases do the most damage. Consider advice around final salary transfers, for example. The client will generally have little experience of making such a decision and have their own biases placing undue weight to perceived benefits of a transfer.

What is required is a detached view from an unbiased adviser to guide a route to the best outcome.

Ups and downs

Contingent charging creates a bizarre dynamic. A negative recommendation generates no income and a positive recommendation must not only support the cost of the advice but also the time where the client has been told to make no changes.

Consider the margin for harm on just one piece of final salary transfer advice compared with a contingent procuration fee on a mortgage. It is exacerbated further when the first transaction cannot be reversed.

Why would any well-run business choose this cross-subsidised approach, rather than to cost each piece of work and each stage of the advice process, and set a price that makes all profitable and self-reliant?

Any advice firm has its own biases – contingent charging or not. The first step is to recognise bias as perfectly human. But the second step is to seek to reduce and remove the structures that support it.

The obvious flaw with a ban on contingent charging is that the less scrupulous firms will simply charge a nominal fee for transfer advice – a “loss leader” to earn margin on the implementation.

In fact, for many, the implementation is just the start, with vertically integrated firms making additional margin on ongoing financial planning, and a platform, and an investment solution.

Most firms will value an at-retirement drawdown client higher than an annuity client, simply based on the long-term nature of the relationship. Drawdown is inherently more complex and therefore more costly to advise on. But while there is no panacea to removing this bias it needs to be recognised. Here, good management information helps.

MI supports the identification of other biases, too: preference for particular platforms, solutions, funds or strategies. We are unlikely to advise a client who demonstrates the fact they are unwilling to follow our advice at our “discovery” stage, which is a bias to avoid those simply using us a portal to access their final salary pension funds.

Finding the right fees

So does a fixed fee or a retainer remove bias? I would say not, as these structures are still prone to “action bias”. It is hard to argue that a fixed annual retainer to tell a client to do nothing feels as valuable as changing some investments or taking some other action that may or may not be of value.

For those criticising contingent charging firms and highlighting these advisers’ bias, I have the greatest concern: in many respects the danger is not simply bias (we are all biased) but a failure to recognise and address these biases. That harbours the most risk of harm.

Alistair Cunningham is director of Wingate Financial Planning

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. Certainly from an implementation (i.e initial/advice) perspective we operate on a fixed fee to make the assessment of such things as DB transfers, where the fee is charged regardless of the recommendation.

    However clearly there is additional work involved if the transfer is to go ahead, coupled with the additional PI and risk costs involved. As such we charge an implementation fee, which the advice fee is rebatable against. So for example the fixed assessment/advice fee may be say £2k, but the implementation fee might be £4k. If the advice is to go ahead, then the £2k is offset against the £4k.

    It is impossible to remove bias, simply because some clients and some recommendations will automatically lead to more fee’s and therefore more potential profit than others. The only way to keep things in check is rigorous compliance standards and checking to ensure that all high risk cases (like DB transfers) are assessed for suitability, which includes any assessment to bias or fee’s swinging recommendations.

    If the advice stacks up, it stacks up, if it doesn’t, it doesn’t, it really is that simple and the only time fee’s would ever take something from suitable to unsuitable, would be for what the FCA define as a self defeating transaction, i.e where the benefit is outweighed by the cost.

    • Duncan Gafney

      99% of the work involved is in putting the case together, not completing an application form.

      By giving advice, you have taken on the liability so you are charging only 50% of the fee but taking on 100% of the liability.

      Alternativelly, it appears you are charging £2,000 to fill out an application form?

      Also, if the transfer does does not proceed, either your decision or the client’s, do you still charge £2,000? Is this paid up front or after the advice has been given?

  2. The issue is not charging contingent or not , lets be clear, its dishonest individuals, companies and fraudsters.

    Do you really believe by banning contingent charging this problem will disappear. If you do like the regulator you are deluded. The regulators pontifications are like throwing a bucket of water on a forest fire.

    The only way to stop the problem of poor advice and fraud is to police it, actually get out of the office, visit, investigate those individuals and firms. It’s not as if the information to identify them is not provided EVERY six month. It’s not as if good regulated advisers are not informing the regulator of concerns about individuals and companies they know are acting dishonestly, or not in the clients interests.
    It takes the regulator years to act, by which time the guilty have long gone, yet again leaving the honest remaining to pay up for regulatory procrastination.
    If you want a great example of this, how many pension pots were stolen last year? Why has pension called calling not been band, websites of Known fraudsters not removed, why does it take three years or more for the regulator to act when from day one of pension freedoms we have been shouting from the roof tops?
    It would be funny if only it was Punch and Judy with us shouting “there over there, there over there”. The only problem is all we get is “where” and “that’s the way to do it”.

    • “The issue is not charging contingent or not , lets be clear, its dishonest individuals, companies and fraudsters.”

      That’s the small issue. The other, much bigger, one is the incompetent individuals, whether that be caused by ignorance, arrogance or capability.

  3. Lots of opinions in this Alistair ……most of, if not all, wrong, nice try….no cigar this time ….

    If you are giving wrong advice just to get paid …… how is the way you charge influenced

    In the same way as if you a giving sound advice

    Wrong or bad advice especially in this area is done by people because it’s easy and on a catch me if and when attitude

    Irrespective if you charge…percentage, flat fee, time charge, luncheon vouchers, or green shield stamps

  4. Is Contingent charging Commissions or Percentage fees ? Jargon Jargon everywhere. Companies like A J bell who refuse to treat customers fairly or deal with Rogue employees prefer to demand you transfer away. Where does the FCA sit with the pension provider Insisting on Companies to transfer out – Is this Pension Transfer Advice ? Is A J bell authorized to “give advice?”

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