At the start of August, the FSA published a consultation paper number 61
on The Regulation of Stakeholder Pensions. At the same time, it issued a
press release which included this key point – when there is an advised
recommendation to buy a traditional pension (including one linked to a
group personal pension), the suitability letter will have to explain why
this was considered to be more suitable than a stakeholder pension.
This will have the greatest impact on IFAs. Most IFAs offer their services
on a commission basis, that is, they explain that they do not charge
clients directly as they
get commission from providers, this commission being disclosed either in
the key features document or the
reasons why letter.
This approach allows the consumer to spread the cost of the advice over
the lifetime of the policy and within
pension plans to get tax relief on the cost of advice. The added value
benefit of the IFA involvement therefore is
a relatively soft-sell.
The new FSA approach to a reasons why not letter will lead to IFAs having
to adopt a more hard-sell approach
to the added value of their service. The IFA service is a combination of
financial education, administration, financial communication,
problem-solving, product endorsement and troubleshooting. The Government's
stakeholder regime assumes that the customer will not require these
services from a stakeholder provider but will adopt a
Alternatively, if a customer wants these services,
they will be obliged to pay for them separately on a
fee basis or hope that the margin between the product provider charges and
the maximum stakeholder charge will generate sufficient remuneration for
providing the service.
In effect, the Government is deciding on behalf of consumers both those
services which they do want to have and on behalf of the provider of that
service what price they are allowed to charge for it. This is classical
socialist command economics. Unfortunately, the history of command
economics demonstrates that such an approach leads to second-rate products
and shoddy service.
This regime could be seriously damaging for the long-term prosperity of
IFAs. The two solutions that could be adopted by IFAs are:
l Either they need to move to dealing with clients on a fee basis or
commission in lieu of fees. Some IFAs have already changed their business
to be fee-oriented but there is
considerable consumer resistance except at the top end of the market.
l Explain that you could offer your services on a commission basis and
when it comes to pension planning explain that the commission available
from stakeholder plans would not be enough to cover costs.
When you are dealing with the big corporate market, you will have to offer
services on a fee basis as commission rates simply will not support the
service level big employers will want.
The great expansion of IFA market share over the last 10 years shows
consumers can be persuaded of the benefit of independent financial advice.
Stakeholder is just another of the many challenges that have been posed by
the Government over the last few
years. I am sure the IFA community is well equipped to meet this challenge.