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