The gold rush of the last 15 months of commission offers riches for group pension IFAs that target the market but there are pitfalls for the unwary.
A lot of business is being done now and, in many cases, that makes sense. If a scheme needs to be redesigned, why not do it while there are resources to do so?
And faced with a huge bill for implementing auto-enrolment, never mind the increased contribution costs of having more scheme members, many firms will welcome a solution that does not cost them anything.
For advisers trying to switch from commission to fees in readiness for the RDR, the commission on offer must be a distraction. One adviser described the fight to keep a client from whom his firm will earn £20,000 a year, where a competitor was set to switch to a new scheme and make £500,000 for doing so. With so much cash on the table, changing business models can easily slip down the priority list.
But there are risks in this last race for business. Some providers have declared they will continue paying commission after the RDR, but others have remained more guarded, which we can probably interpret as saying they will turn the tap off come 2013.
Furthermore, many new schemes with high up-front charges are doing so on the basis of active member discounts at or approaching the stakeholder charge cap. In an RDR world, it seems counter-intuitive that the people for whom the adviser, employer or provider are doing least should be charged the most for being a member of a pension scheme.
Another potential concern is clawback of commission on schemes that are lost. If they are not careful, some intermediaries will find themselves making the switch from commission to fees in the first quarter of 2013.
With no up-front commission coming through the front door, advisers will need to make sure their cashflow projections allow for money going out the back.
Advisers need to think about the risk of being targeted by competitors, and what clawback on existing schemes could do to their cashflow in 2013.
The crescendo of business that commission-based advisers will experience over the next 15 months will doubtless be followed by a lull. The many advisers on contracts terminating on December 31, 2012 are well aware of that.
But some argue the experience of seeing their revenue stream turned off so quickly will dictate the structure of consultancy-charging arrangements, leading to a portion of first year’s contribution model rather than an AMC approach.
Most providers are torn between not wanting to interfere with a contract between advisers and employers, and worrying at the reputational risk they will suffer if advisers are perceived as taking too much through products that carry their brand.
Scottish Life chief executive John Dean is clear that advisers can take 100 per cent of first year’s employer contributions, and even some of the employee’s. But it remains to be seen whether employers, the public or even the DWP will stand for such a structure. Pensions minister Steve Webb’s pronouncements on auto-enrolment charges hardly chime with losing 100 per cent of first year’s premiums.
Advisers will not want to find themselves boxed into the corner of having to take high upfront consultancy charges to keep their businesses afloat.
John Greenwood is editor of Corporate Adviser