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Can contingent charging stand up to criticism?

percentageContingent charging is being thrust into the spotlight again as clients continue to pay for defined benefit pension transfers, but an outright ban does not look imminent.

The FCA has long warned charges that depend on a particular outcome – ‘contingent’ fees – are a higher risk for IFAs. They may not affect the outcome of the advice, just as commission may not have – but they sit uncomfortably with the new fee-led advisory world for many.

It is particularly uncomfortable in the context of DB transfers. The sums are large, the decision often finely balanced and the right option is unique to every client. It is also an area where the regulator is already taking some considerable interest.

Yet a survey of advisers by AJ Bell in June showed that around half still charge on a contingent basis for defined benefit pension transfers. Clients pay a percentage of the transfer value, and advisers only receive payment if the transfer goes ahead.

SimplyBiz recently had a deal with Selectapension where advisers received a 40 per cent referral fee if a transfer went ahead. National advice firm True Potential has controversially handed out leaflets advertising its final salary transfer scheme to members of the British Steel Pension Scheme – onstensibly to generate advice fees.

At first glance, the conflicts of interests are clear. Capital Asset Management chief executive Alan Smith says: “It’s down to the magic word ‘incentives’. If you study a lot of the negative incidents in financial services over the previous 25 to 30 years, you can trace them back to poor incentives.

Blog: Why contingent charging on DB transfers just won’t cut it

“As human beings, we are prone to enlightened self-interest. We can tick boxes and be compliant, but if course of action A brings in nothing, and course of action B brings in thousands of pounds, it is an ethical and moral challenge.”

He notes the FCA’s starting point is that the majority of those with DB schemes should not be advised to switch, yet the actual percentage of those being advised to switch is far higher. There is also a cross-subsidy issue: in theory, those clients that receive a free recommendation to stay are being subsidised by those that leave.

The FCA, for its part, stops short of an outright ban. The rules currently state that when an adviser charges on a contingent basis they should consider conflicts of interest and ensure there are “appropriate controls” in place.

FCA director of supervision Megan Butler (profiled on page 8), says: “We have been very clear and have reminded firms that we expect them to manage any of those potential conflicts of interest. We all recognise there is an inherent conflict of interest so firms need to be very careful about how they are managing it.

“Be really clear on what the costs are, what the fees are, where they are going and, importantly, and this is a point we are trying to emphasise, this is not just about the upfront fee. It’s about the fees that are actually embedded in a fund that may be the destination. We would observe that there is a focus on the initial fee, but less focus on the ongoing charges, some of which can be very substantial and they are sufficiently substantial to be relevant to the decision as to whether that final destination is suitable.”

The case for contingency

The arguments for contingent charging are often based around the willingness and ability of the client to pay for advice to remain in a DB scheme. Supporters say many clients don’t have the money upfront to pay for the advice and therefore can only pay from the fund. They also point out that this type of charging is commonplace in other professions. In conveyancing, for example, homebuyers do not always pay when the transaction does not go through.

Equally, if an adviser gives bad advice on DB transfers, there is still a regulatory backstop for the client, regardless of charging structure.

Regulatory consultant Rory Percival says the regulator is likely to stop short of an outright ban, but advisers should not neglect the advantages of introducing non-contingent charging.

He says: “One non-contingent charging firm I work with said that clients liked the transparency of this type of fee structure. It meant they could completely trust the advice they were given, and they thought they were getting more clients as a result.”

DB transfers: Half of advisers use contingent charging

While there is a psychological challenge to changing fees, many who have done it are pleased with the result, and it had not been a significant issue for clients.

“It is not all or nothing,” Percival adds. “You can do it on a trial basis for a period of time, or offer a choice.”

Wingate Financial Planning IFA Alistair Cunningham says his firm does not allow pension transfer advice to be paid for from the pension fund. They have had no negative feedback from their clients on it, who understand what they are getting.

Finance writer and former adviser Jason Butler says: “The cost of the advice should be the same whether a transfer is recommended or not and the advice firm should presume that the client will arrange any transfer transaction themselves when determining their advice fees.

“Transacting a transfer is a separate service and can be provided by any firm, whether they have the original advice or not, and should be subject to a separate fee, but which reflects the actual work involved (not much) and risk to the firm (very little).”

Others are convinced a ban is needed. Montfort head of financial planning Eugen Neagu says: “A rule must be implemented whereby each firm should instead charge a minimum amount which covers the cost of its advice to the client may a transfer not subsequently ensue.

“We found the regulator very reluctant this summer, however I believe they are now under pressure to reconsider their initial strategy.”

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DB transfers: Half of advisers use contingent charging

A survey of advisers has revealed that half still charge on a contingent basis for defined benefit pension transfers. A poll conducted by AJ Bell shows that 50 per cent of advisers conducting DB transfers are getting clients to pay for them by paying a percentage of the transfer value, and only receive payment if […]

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Comments

There are 21 comments at the moment, we would love to hear your opinion too.

  1. If you want to be both independent and impartial then don’t charge contingent fees.

    • Whats the way you charge got to do with independence and or being impartial ?

      That’s like saying, don’t wear lipstick and a short skirt if you don’t want called a tart ?

      Bit medieval thinking ! and a sweeping statement ?

  2. Had to go and see a heart surgeon today, he charged me £25,000 for a one hour meeting as he didn’t want to be seen to be charging differently depending upon whether or not he operated.

    Yes, fees need to reflect the work done but also the ongoing liability. Yes the work done in hours may be similar but the cost of the liability is significantly different. I am not sure your PI insurer thinks the risk of advising a client to stay in a DB scheme is the same as advising a client to leave a DB scheme?

  3. I recently spoke to a prospective client who said he had already had paid £2,000 for a TVAS report and the IFA firm involved had not made a firm recommendation e.g. they sat on the fence and said you can transfer if you wish or you can stay in the DB scheme and they did not make a commitment either way for the fear or reprisal from the regulator. I don’t call this fair.

    There is nothing wrong with contingent charging if it’s handled correctly. A qualified adviser should be able to establish early on with the prospective client whether the their personal (and spouse) “phyche” and understanding of DB v DC is suitable for them. Whilst also assessing a real and qualifying mitigating reason why a transfer should take place.

    The problem with charging up front regardless for any work done. This may include educating the client about DB v DC schemes, means an adviser can no longer have a meaningful conversation with anyone without being accused of being motivated purely on pushing a transfer through!

  4. “Transacting a transfer is a separate service and can be provided by any firm, whether they have the original advice or not, and should be subject to a separate fee, but which reflects the actual work involved (not much) and risk to the firm (very little)” Not true. Anyone who came to us for transacting someone else’s recommendation would be sent away. We would wish to recheck and revalidate that advice and I would suggest that few clients go elsewhere for implementation.
    As for contingent charging – how do you stop it in practical terms?

    • If the client does not wish to arrange the actual transfer from a DB scheme to a personal pension through the adviser who gave the original transfer advice (whether that was to stay or go), they have two choices.

      They can approach a SIPP provider direct like Alliance Trust or Rowenmoor or they can approach another adviser and ask them to select a SIPP and arrange the transfer.

      In both cases the client needs to show the SIPP provider or the arranging adviser the original adviser’s confirmation letter of advice having been given.

      In the case of a direct transfer application between the SIPP provider and the client it is up to the SIPP provider as to whether they are prepared to accept a no transfer recommendation but the provider has no risk in relation to the original transfer recommendation, which stays with the original adviser.

      In the case of a transfer arranged by an adviser who didn’t give the original transfer advice, it is up to them to decide whether they are prepared to facilitate a transfer on a non-advised basis, regardless of the original recommendation. If the original adviser and the transferring adviser are not connected in any way, then the risk to the facilitating adviser will be very low.

      • Good luck with that one Jason. No one should be conducting transfers on an execution only basis or relying on the advice of another adviser. We need to stand up and be counted. If we think it is suitable and can be justified, then advise and charge accordingly but saying “he/she said it was ok” is a very dangerous path. Also if the first adviser is no longer in business do you think you are safe?

        • I don’t have DB qualifications (i.e. G60, AF3, AF7 etc)and my firm doesn’t have DB transfer permissions and you have to have BOTH to effect a transfer. (my locum has the qualification, but not the permissions), so if a qualified adviser advises against in writing, I cannot (and don’t want to be) a party to the transfer.
          If I did have the qualification and someone came to me who’d been advised NOT to transfer, not only do I think it a dumb idea to take on the risk without charging trhough the nose, but I suspect any PI insurer once told this woudl tell you they will not cover the risk.
          I’d rather help someone who kows what they are doing, but can’t top themselves than help someone who doesn’t know what they are doing commite financial suicide.

  5. There is an element of, “what the eye don’t see the heart don’t grieve” in contingent charging…. I get that, however I personally don’t think clients mind that.

    Clients know exactly what they are being charged, what for, and by whom.

    I can honestly say some of my clients like to give me a cheque…. lots don’t, and say take it out of the plan I know I am being charges and know exactly how much you are charging but I don’t want to write a cheque, (who does write cheques these days ?)

    All of my ongoing fees are paid from the plan, simple for the client, and have to say simple for my business.

    I think it is very poor, and very dangerous to say there is a direct link between contingent charging and bad advice (many intimate this) bad advice is bad advice irrespective of the charging structure !!!

  6. Fees for advice to stay within a DB scheme are VAT’able whereas fees to transfer to a SIPP (or other suitable product) are exempt. Try explaining that one to your client?

    • That is not my understanding. If the intention at outset is to provide an exempt supply, in this case intermediation of the arrangement of the pension plan funded from a DB pension transfer, then the fee should be VAT exempt, whether the transfer goes ahead or not. It’s the same if you give advice on the arrangement of a life insurance plan but the client doesn’t proceed (for whatever reason).

  7. Firstly, lets not loose sight of the fact contingent or not, the advice needs to stand up to scrutiny and compliant. Contingent fees don’t impact on that.

    Secondly, DB has brought this to the fore – but in reality, is the issue any different to any other investment?

    Thirdly – removing it will see some unable to pay for advice (yes, the argument then is, should they transfer out of DB if no cash reserves, but that’s not the point under consideration here).

    Fourthly – there will be some who won’t pay fees and therefore will seek advisers who are contingent and potentially compromise their choice of adviser as a result.

    Finally – I don’t see the link between contingent charging or otherwise and whether that is paid for out of the pension assets.

    Going back to point 1, contingent charging is a risk but if the advice is professional, clear, compliant and in the client’s best interest, then it arguably becomes irrelevant.

    There are bigger issues at play in the world of DB at present, and I’d say getting good quality advice and understanding the nature of the risks (and underlying investments) are key.

  8. If a Client has a charge of £2,000 and pays it via his pension it is still £2,000, If he writes a cheque to take the money from his earnings via a bank account and he is a HRT payer it will cost £3,333.33 bnefore 40% tax is paid.
    Go figure!

  9. Even if you charge a fee there is still a contingent conflict in most cases. Why? Because there’s a big difference in ongoing fees dependent on whether you say transfer or not.

    As Jarrod Ellis pointed out this is no different in any other profession, including the medical.

    In fact, it’s simply a matter of professionalism, trust and ethics. If the adviser you are dealing with doesn’t engender these attributes then no amount of rules or regulations will make any difference whatsoever practically. Equally, if an adviser has these attributes then no amount of money is going to persuade them to do anything other than a good job.

    Regulators would achieve more by putting resources into identifying and banning the bad apples. But it’s a lot easier to talk about issues, make rules and point the finger at advisers generally than it is to make things happen…

  10. I agree with you.

  11. Why would a professional want to commit to undertaking hours of analysis for potentially no remuneration? Bonkers.

  12. Clarity and choice is what clients need.
    I have the qualifications and permissions to advise on whether or not to transfer DB schemes.
    I make the following points.
    1) In all the cases where I have advised clients to transfer they have needed ongoing advice on not just the fund and product choice for their funds, but also the financial planning and ongoing advice about how to use their funds to fund their retirements. The only exception was a transfer for a paraplanner with as much knowledge as me about financial planning but who needed my advice on this specialist area. Therefore in all cases but this one I have generated revenue and advice activity as a result of advice to transfer. Regardless of whether or not I had charged a contingent fee or a non-contingent fee for the initial advice, this incentive to transfer would be there anyway. It matters not whether this ongoing advice would be paid for from the fund or from outside the pension, that extra revenue will be there for the firm I work for on an ongoing basis.
    2) Do people who suggest non-contingent charging really mean this in full? Maybe they mean there should be a non-contingent fee charged for the advice itself and then an additional fee only if the transfer proceeds to cover additional work and PI risk (which is very high)? If they do not mean this, the non-contingent fee would have to be pretty high to cover all the cases where transfers are recommended. We would be talking several thousand pounds here. And even then if the adviser is driven only by profit, there is still the incentive for non-ethical advisers to transfer anyway in marginal cases so as to benefit from ongoing advice fees.
    3) If it is the case that we move to a non-contingent advice fee, who will set that fee? The advice firm or the regulator or the trustees? Who will pay that fee? Here is where the regulator could think a bit more sensibly if non-contingent charging is what they want. Why not present the client and employer firm with the following options:
    i)trustees/employer to pay for all or some of advice firm’s non-contingent advice fee and for this not to be a taxable benefit.
    ii)Member to pay the contingent charge from their own funds.
    iii)Scheme to pay for the non-contingent advice via an actuarial deduction to their benefits if they decide to remain.
    iv)Member to pay advice fee from transferred funds.
    It doesn’t have to be rocket science, and this then gives the client the option to pay a non-contingent fee from any of the 4 choices above that are open to them.
    4) Remember, all advice given that carries a fee is business for the adviser, so there is always an incentive to generate advice and generate fees. The things which stop us transgressing are our morals and ethics not the method of payments.

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