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 self-service approach.
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 the person 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:
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.
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.