Advisers who jump into offering automatic-enrolment services without the necessary knowledge and expertise are running the risk of falling foul of compliance, experts warn.
There are growing fears advisers believe they have to offer clients help with their auto-enrolment duties to retain business and are entering the market unprepared. Hundreds of thousands of small and medium- sized employers will be hitting their staging dates each month from the end of 2015, putting massive strain on business owners – many of whom will turn to their advisers for help.
Independent compliance consultant Adam Samuel says: “There’s a real danger here of IFAs diving in and then realising they don’t know enough about the right bits.
“There’s a real risk of people trying to recommend the wrong solution for auto-enrolment. There is a tendency among advisers in the corporate pensions environment to do things for which they are not properly insured, and not necessarily regulated.”
IT is an area where advisers need to be particularly careful, says Samuel.
“A lot of IFAs get an IT solution sold to them which they are hopelessly ill-qualified to advise on because that’s not what they know about,” he says. “In the real world, that’s advice. If something goes hopelessly wrong, their professional indemnity insurance will not pick it up because it’s not insured.”
Principal Financial Solutions director Chris Daems agrees there is a “great risk” of inexperienced advisers tripping over regulations.
“Most advisers assume auto-enrolment is all about pensions when in reality it’s more about systems and processes and project management.
“Advisers can still build these systems and have a robust and compliant process moving forward, however there are two things they need to be aware of.
“Firstly, without these robust procedures, falling foul of regulation will be more likely, especially if the adviser just dips their toe into auto-enrolment. Secondly, and especially as we approach the SME and micro market, the systems and processes advisers build to service their clients need to be as streamlined as possible with clear lines to designate who is responsible for what.”
However, Rowley Turton director Scott Gallagher thinks the bigger issue is not of advisers’ liability – as employers are ultimately responsible for auto-enrolment – but in having insufficient knowledge to help clients comply.
“It’s not as simple as thinking, ‘we’ve got employers who need help, we know about pensions’. It’s not a compliance risk in the traditional sense but there’s a lot to learn and a lot you could fall flat on your face,” he says.
Nest central account manager Paul Budgen warns if advisers do not offer auto-enrolment services they “run the risk of a client going to a competitor adviser and finding out that existing business relationship is at risk”.
His warning is being echoed across the industry.
Standard Life head of corporate strategy and propositions Jamie Jenkins says: “Advisers have told me a year ago they were just servicing private clients but started to realise that a lot of people they work with have a connection to auto-enrolment and want to know about it.
“They said it’s a risk if we don’t get involved that they’ll go somewhere else. And vice versa – we’ve seen corporate advisers seeing opportunities to take on private clients after working on auto-enrolment.”
LEBC divisional director of group savings and investments Glynn Jones says “jack-of-all-trades” advisers could be “taking on a lot of risk” by taking on auto-enrolment work they don’t full understand. He says rather than seeing other firms as a threat, advisers should consider subcontracting out technical auto-enrolment business to specialists.
Ringrose Grimsley IFA Victor Sacks says he works with a whole range of professionals to serve clients’ auto-enrolment needs.
He says: “I can’t see how 20,000 advisers can serve one million companies on their own. They need to get accountants involved.”
Recent figures from The Pensions Regulator reveal how SMEs are planning to turn to accountants rather than IFAs, as their staging dates approach. While 27 per cent of medium-sized employers plan to speak to an IFA compared with just 14 per cent who favour an accountant, a quarter of micro employers plan to consult their accountant.
First Actuarial director Henry Tapper says accountants are seeing auto-enrolment as a big opportunity and claims advisers could “lose out” if they don’t participate.
“There’s a danger of losing business to accountants. If they do a good job on auto-enrolment, the client might go to them first next time there’s a problem”, he says.
Accountancy firm Woods Squared director Alan Woods says his firm sees big opportunities in auto-enrolment as many advisers have not wanted to take on the administrative burden. “The impression we’re getting with the smaller IFAs is they don’t want to be involved. They used to take commission from individual pensions and now they’re not sure where the money comes from.”
Accord Financial Planning managing director Matt Ray is one such adviser who is not interested in auto-enrolment. He says individual planning is his focus and the heavy investment needed in knowledge and resources would offset any benefits. But he concedes his lack of involvement could impact his professional relationships.
“For accountants for instance, it might often be easier for them to deal with one adviser”, he says.
Woods says if employers find their advisers are reluctant to help with auto-enrolment, his firm will recommend an adviser who is.
Cost of business
Nest’s Budgen says if people think there is not enough money to be made in auto-enrolment business, they do not have a good enough grasp of the opportunity.
He says: “Nobody has ever operated in this kind of market – this is mandatory, we’ve never known anything like this before.
“A lot of wealth managers say they will do this pretty much at cost because then they have other opportunities to speak to directors about their affairs and other benefit structures, such as group life cover. It’s a really good way of speaking to lots of small employers you haven’t spoken to before.”
Woods says some advisers are treating auto-enrolment as almost loss leading business, with little or no profit margin but necessary to retain important client relationships.
But Gallacher says: “The demand is massive, the supply is low – you don’t need to be loss leading to have those doors open to you, they’re open anyway”.
He says advisers who go into business with third parties “need to make sure there’s a proper agreement to ensure they don’t poach your clients”.
He says the next few months represent the “last chance advisers have to get into the market”.
I firmly believe advisers should focus on where they feel their strengths are. If an adviser feels helping employers with auto-enrolment is not their bag, they should avoid it.
There is a huge commercial opportunity with over a million employers yet to comply. There is a massive advice gap when it comes to auto-enrolment. But there are also other niches which can be equally as profitable.
There is a small risk that advisers who do not get involved with auto-enrolment, and who have business owners, managing directors and finance directors of businesses, have more competition due to that individual building a relationship with their corporate adviser. However, this can be mitigated by collaborating with specialists in the auto-enrolment sector who you trust to manage AE on behalf of these clients, leaving the high-net-worth adviser to deal with what they feel they are good at.
There is a great risk advisers fall foul of regulations. Most advisers when they get into the auto-enrolment market assume that it is all about pensions when in reality it is more about systems and processes and project management (and a tiny bit about pensions). We learned that early on and built systems and processes designed to ensure we could help employers comply.
As a rule I do not believe in “loss leading work”. Auto-enrolment as a task needs to be profitable in its own right or should not be done. This was relatively easy in the large and medium-sized employer market but is tougher now (and in the market we will be in in the next few years). However, I believe the secret is in ensuring streamlined or automated procedures to ensure auto-enrolment can be complied with in the SME and micro market.
Chris Daems is director at Auto Enrolment Advisory Group