Has time run out for contingent charging?

Michael Klimes and Hope William-Smith unearth the way IFAs are charging clients for transfers and if clients are being short changed

MM’s survey of firms shows a huge range of views across the market

Defined benefit transfers never seem to leave the headlines, and one of the most contentious areas is contingent charging.

This is when the level of charges is based on a particular outcome, meaning an IFA is paid more if a client transfers rather than charging a fixed or time-cost fee for the recommendation either way.

There is a spectrum of contingent charging, which can be applied to both the recommendation to transfer, or the investment of assets, or both.

There is a huge contrast in views on contingent charging across the market, with figures such as MP Frank Field believing it incentivises IFAs to act against the best interests of clients.

In February 2018, the work and pensions select committee chaired by Field called for a ban on the practice in a report examining how financial regulators dealt with the British Steel Pension Scheme crisis.

The same committee has now taken a deeper look into the issue of contingent fees and how charging for pension transfer advice works. The deadline for submissions closed on 31 January.

Other commentators disagree with Field and point out that a ban on contingent charging would not remove all conflicts of interest in DB transfers, while some are agnostic on the matter. In October 2018, the FCA published its new rules on DB transfers and said the evidence it has seen “does not show that contingent charging is the main driver of poor outcomes for customers”.

Although there are many opinions about contingent charging, there is little in the way of data to shed light on whether different charging structures at IFAs influence the proportion of clients that end up transferring.

Do IFAs which practice contingent charging grab more market share than IFAs that do not use a contingent charging structure?

What proportion of assets under DB transfer at vertically integrated firms are going into in-house funds?

Money Marketing set out to gather information on how major advice players charge for transfers.

Our survey

We sent a questionnaire to 10 advice firms and asked them about their charging structures to see what they reveal about the above questions. The survey was sent to firms across the market: St James’s Place, LEBC, Openwork, Fairstone, Intrinsic, Succession, Sesame Bankhall, Lighthouse, Chase de Vere and Brewin Dolphin.

All of Money Marketing’s DB transfer coverage, all in one place

The four that replied were SJP, LEBC, Intrinsic and Chase de Vere, while Fairstone and Succession declined to comment. Openwork and Lighthouse did not respond.

Sesame Bankhall pulled out of investment advice several years ago to focus on mortgage and protection planning, and confirmed it would not make a special case for DB transfers. Brewin Dolphin has also elected not to advise on DB transfers.

The answers from those that did reply demonstrate just how nuanced the issue of contingent charging is.

SJP, LEBC, Intrinsic and Chase de Vere not only all charge clients differently, but also make contrasting comments about contingent charging based on this fact.

The questions Money Marketing asked firms on DB transfers

  • If hourly fees are charged for pension transfer advice, please detail what these are.
  • If fixed fees are charged, please detail what services or parts of services these are for (e.g. TVAS report, transfer value quotation etc)
  • If you charge a financial planning fee regardless of recommendation, please detail what this is
  • If you charge based on percentage of assets, please outline these charges
  • If you charge ongoing fees for advice/investment please detail these charges

Before examining the answers in detail, it is worth exploring the written evidence consultants Lane, Clark and Peacock submitted to the work and pension select committee’s inquiry on charges.

The consultancy’s contribution was written by LCP partner Jonathan Camfield, who Money Marketing contacted to gain further insight about the firm’s perspective on contingent charging.

According to Camfield’s submission, LCP gives actuarial and/or administrative advice to over 40 per cent of workplace schemes in the FTSE 100.

In written evidence Camfield argues the main problem is not contingent charging but the “conflict of interest is created by the practice of ‘own funds transfers’… That is, the practice of IFAs also recommending the transfer of a member’s pension
money into investment wrappers that are run by the IFA”.

Camfield says: “In our experience a very significant number of IFAs operate a full or partial contingent charging model. A vertically integrated firm with a contingent charging structure will be able to charge a client 1 or 2 per cent for the rest of their lifetime after a successful DB transfer.”

The FOS and British Steel campaigners will be joining Money Marketing to discuss DB transfers at our flagship conference in April. Book your free place now

A funnel for funds?

A big brand IFA that approached LCP to make introductions is not the only notable experience it has had recently. In the past 12 months, four or five of LCP’s clients ranging from trustee boards to employers have reiterated to it they do not like IFAs that practise contingent charging.

LCP says it has taken a number of initiatives to keep abreast of these issues related to contingent charging.

In mid-2018 it asked two high-street IFAs that are vertically integrated and use a contingent charging model to outline what proportion of clients end up transferring one way or the other.

The question was also asked of IFAs not working under vertically integrated brands who do not charge on a contingent basis.

The first IFAs said 50 per cent transfer, while the those not on a contingent structure said 25 per cent transfer.

Although Camfield says the figures do raise eyebrows, he adds conclusions should not be made as the motivation for clients in the samples was different.

The former sample of clients were inclined to transfer already and in the latter they were just looking for an IFA to talk to about their retirement options, he believes.

In the past six months, LCP has also attempted to track what proportion of assets in the DB transfers are going into in-house funds.

In the past three months, it has also hosted two DB transfer seminars, with the first attended by the top 10 leading independent trustee firms and the second by in-house actuaries from DB schemes of big banks and mining companies.

In both seminars, LCP polled delegates on their thoughts around contingent charging structures. Half said they thought it should be banned while the other 50 per cent said it should be restricted.

Camfield says: “I have had a number of discussions with senior regulators recently and although BSPS has caught the headlines I am deeply concerned the same thing is happening day to day at smaller DB schemes.

“Tens of thousands of consumers are losing out and we estimate £2bn-£3bn is being lost every year. The minority of transfers will be those who should have never transferred out in the first place but the majority should have transferred but they are in high-charging Sipp products. Where are the funds going and what is the cost of that? I have brought this up with senior regulators.”

Adviser view

Nigel McTear, Director at Signpost Financial Planning

I don’t think getting rid of contingent charging would make DB transfers any safer than they are now or improve clients’ outcomes in a positive way. There are plenty of reasons for that, but it would be unlikely for an adviser to just push a client through into a transfer to get the money that comes from it. It is just so risky doing DB transfers so really the fee is relatively minor. So much of the process is non-transactional as well. You have to know the client and what they want for the rest of their life.

The mix of the market

In our survey, SJP, LEBC, Intrinsic and Chase de Vere provided a wide range of responses. SJP charges on a percentage of assets basis for DB transfers and has an ongoing advice charge of 0.5 per cent per annum.

The total is split between an advice charge and product charge, but includes exit fees scaling down over a six-year period.

Regarding the merit of contingent charging, an SJP spokesman says: “We agree with the FCA’s recent findings that there isn’t any evidence linking contingent charging to unsuitable advice.

“There are many professional firms across the industry with a variety of charging arrangements, including contingent charging, which provide clients with much-needed suitable advice and have the right checks and balances in place to ensure any conflicts of interest are managed appropriately.”

This take is the opposite of what LEBC advocates on contingent charging.

The group has a fixed monetary fee for the suitability report and implementation of recommendations. There is an ongoing fund charge based on a percentage of funds under management if the client stays with the firm.

LEBC public policy director Kay Ingram says: “We believe that a fixed fee is fair to consumers as a recommendation not to transfer requires as much input as one to transfer. By asking all clients to pay for the advice they receive, not just those we recommend to transfer, we are able to be impartial and reduce the cost of advice for everyone, making this more affordable for all.

“The no transfer, no fee model is favoured by some firms who may be more interested in creating volume sales than in offering advice that will stand the test of time.

“These firms, often working with unregulated introducers, were at the heart of the concerns raised about the suitability of transfer advice last year. They are too easily able to liquidate their businesses, leaving redress for poor advice to be paid by other advisers. This in turn pushes up the cost of advice.”

Quilter-owned Intrinsic says that under the terms of its network model, pricing is not dictated to advisers.

There are constraints in place for the advice process around DB transfers, but fees are not included in that.

This means each IFA within the network would have their own answers to Money Marketing’s questions, and there are hundreds of these IFAs.

Intrinsic chief executive Andy Thompson says: “I can absolutely understand the debate on contingent charging. It is an immensely tricky area around a piece of advice that will often be the most important in a client’s life. So it’s absolutely critical that we are confident that it works in the best interest of clients. Contingent charging does present a conflict, but there are ways to mitigate it.

Adviser view

Darren Cooke, Director at Red Circle Financial Planning

You cannot stop contingent charging and the FCA has been absolutely clear on that. There are ways around things, even when advisers charge a fixed fee. Active Wealth, for example, charged a fix fee and so did other firms that transferred people from the BSPS. Contingent charging is not the problem because a fixed fee with ongoing fees ends up being the same anyway. You can’t stop some advisers doing what they do. Shoddy advisers are the problem and, unfortunately, you cannot regulate bad ethics out of existence.

“As a large firm we are fortunate enough to have a system in place so that the ultimate decision around whether or not to transfer does not sit solely with the adviser and so removes the conflict. Intrinsic has robust controls such as pre-approval of all cases by a compliance department that independently checks all aspects of the case to determine suitability.”

Chase de Vere says it separates the charge on the advice on whether to transfer or not (step one) from the implementation of the transfer if it takes place (step two).

For step one it charges a flat fee which is typically £2,400+VAT. The client pays this fee regardless of whether Chase de Vere advises them to transfer or not.

The group says it does not let its advisers charge contingent or product facilitation fees for this advice.

For step two, Chase de Vere says it will refuse to transact a transfer if it thinks it is significantly detrimental to the client.

A Chase de Vere spokesman adds: “If we implement a transfer, we will either charge hourly fees (£250 per hour for an adviser and £80 per hour for paraplanner or administrator) or we will charge a percentage fee of up to a maximum of 3 per cent.

“If ongoing independent financial advice fees are charged on a percentage basis these will typically be 1 per cent per annum. We will discuss and agree the options with the client.”

These responses show it is clear in both large and small firms that contingent charging is a nuanced area that requires careful handling by regulators, but also that more research still needs to be done on what proportion of assets in DB transfers are going into in-house funds to understand any conflicts of interest.

Expert view

Customers don’t want to hear the risks on contingent charging

Keith Richards, chief executive at the Personal Finance Society

The increased scrutiny of defined benefit transfers and the British Steel Pension Scheme fiasco have thrust several important issues under the spotlight, not least the role of contingent charging, which the profession has a duty of care to acknowledge.

There is no denying the logical view of the work and pensions select committee that a ban would remove this potential conflict, albeit based on a minority of advisers putting their own commercial interests above that of the client. But this action in itself could introduce additional consequences, reduced consumer choice, and derail pension freedoms more broadly.

The separation of an initial review/recommendation fee from any dependency to transact could be one way of demonstrating the recognition and mitigation of the potential conflict, as well as setting client expectations that a transfer may not be a suitable recommendation from the outset. If the recommendation is to proceed, however, contingent charging is more often than not the preferred and most convenient option for clients.

The need for consumers to do something is often evident from the outset – meaning that the use of contingent fee charging is appealing.

The sector needs to consider the inherent risk to contingent charging more widely in advice where it is usually more convenient or preferred by consumers if we don’t.

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Comments

There are 22 comments at the moment, we would love to hear your opinion too.

  1. Yes, for DB transfers and the Adviser should not also be the recipient of the assets if the advice is to transfer. Whichever way you look at it, there MUST be a conflict of interest; no ongoing vs ongoing?

  2. Here’s me thinking Hector and his chums had changed the world with a commission ban and qualifications! The culture of greed still exists and instead MP’s nipping away at IFAs, why aren’t they making the regulator accountable and the providers who willingly recieve transfer funds?
    Six years on from the £9bn RDR implementaion and we are no further forward other than the providers having a free distribution model!
    Would Frank Field mind disclosing his cost to the nation and what he has actually done, along with the rest of the ‘gravy train passengers’?

    • Peter’s comment about providers having a free distribution model is something we need to focus on. It is a staggering statement! And true. And the fact that providers and regulators alike carry no liability for advice, and are therefore very relaxed about what goes on. They have no motivation to make sure things are OK.

  3. I don’t get involved with DB transfers so it makes no odds to me.

    However

    Less people would be inclined to seek advice if they thought they were going to get charged many hundreds of pounds just for a review. That’s pretty certain. It might well have been in their interests to transfer but they would not even have given themselves the chance to find out what was best for them, because they wouldn’t want to hand over money from their own pocket.

    I said this about the RDR and I will say it about contingent charging, in general. If you are a crooked IFA you will find a way to make money out of any situation. The RDR took away some of the public’s rights. They used to have a choice of commission or fees but that choice is now denied to them.

    If you are an honest IFA you will not stitch people up. If you are inclined to stitch them up you will do it whatever the regulations – but you shouldn’t be working in this industry, period.

    I’m all for harsh penalties for criminal advisers but don’t keep trying to fiddle the public out of their right to choose.

  4. My colleague has a case at the moment of a client with multiple defined benefit pensions accumulated over a number of years. So far it has taken and inordinate amount of research and administration getting the information from the scheme administrators often resulting in prolonged delays tying all the info together before presenting the options. So far we are 6 months down the road from commencement and still not complete. Many of the schemes are extremely slow in providing information and when they do, information is missing that enables us to make a judgement on behalf of the client and results in us going back to them resulting in further delays. The amount of time spent has been massive. In his initial disclosure he agreed with the client to charge 3% + 0.5%pa ongoing service fee. If this had been a time spent operation I hate to think what the final bill would have been….

    • That client is getting a great deal and great service. Of course we rarely get to hear of these cases as they are not scandalous!

    • 3% plus 0.5% of what? Nothing, if best advice is to leave all of the existing DB schemes as they are. Why isn’t he/she charging for their time? Bonkers.

    • My point is that rarely if ever do we come across a single defined benefit scheme that the client wishes to consider for potential transfer to a SIPP or equivalent scheme. One single contact, one single scheme, one single result. Easy.. should take but a short while. It is the tying in and analyzing of a multiplicity of schemes, Final Salary, Money purchase and personal that have to be presented as a complete package to the client that takes the time and this is now becoming the norm…

  5. I don’t understand the basis of the FCA’s claim that CC cannot be banned. Why could it not just issue an unambiguous edict that advice (in this area) must be subject to a fee, irrespective of whether or not a transfer is the result?

    An element of bias can never be entirely eliminated because most advisers are hungry to get assets under advice with an ongoing servicing charge, but at least the risk posed by conflict of interest could be dramatically reduced.

    And, as I (and others) have said before: Anyone (other than somebody with severely impaired life expectancy) who is either unwilling or unable to pay a set fee for thorough and impartial advice on a subject as potentially life-changing as this very probably isn’t a suitable candidate for transferring the value of guaranteed and index-linked benefits into the money purchase domain. To my knowledge, nobody has yet challenged this view.

    • Julian, I would be happy to challenge the assertion you have made in your last paragraph.

      Quite frankly it’s hard for me to imagine you have never met anybody that had done quite well for themselves (in financial/business terms) that hate forking out for anything. Quite often it seems to be the tight-fisted that are well off.

      According to your theory they wouldn’t be suitable for advice on whether to transfer out of a DB scheme.

      I’d like to see your evidence to that effect, because I suspect you don’t have any. It is just a theory, which doesn’t hold water.

      • One way or another, such people will have to fork out one way or another if they transfer, which may well be on the basis of a somewhat less than scrupulously impartial recommendation. Or are you of the opinion that the conflict of interest posed by CC is just a theory that doesn’t hold water?

        All I’m saying is that to minimise the bias that a conflict of interest can create, the full cost of advice should be chargeable by way of a fee with no implementation fee.

        My theory that those either unwilling or unable to pay a fee very probably shouldn’t transfer is based on the following:-

        1. The mind set of the adviser before he starts work should (as far as is practically possible) be: What and when I get paid for this programme of work will be have no bearing on how I approach it or on my conclusions. That line of thought simply cannot prevail with CC.

        2. A client who’s too darned mean or too blinkered to pay a fee upfront for thorough, impartial and professional advice almost certainly doesn’t value it and is shutting his eyes to the risk of bias. Send him on his way.

        3. A client who can’t afford a fee almost certainly doesn’t have sufficient free assets to be able to cope with the risks of being worse off than if he’d stayed put.

        4. Show me the results of the following surveys on a selection of transfer advice events:-

        a. 200 undertaken on a CC basis. How many of them are, beyond reasonable doubt or debate, more than 90% suitable?

        b. 200 undertaken on a NCC basis. How many of them are, beyond reasonable doubt or debate, more than 90% suitable?

        I would bet that the percentage for scenario 1. is considerably lower than for scenario 2.

        But, as ever, I may be wrong, in which case I’ll pipe down.

  6. City lawyers, investment bankers etc all stand to gain greater reward for ‘deals’ which complete, than for those which abort. They are heavily incentivised for deals to complete – but does it mean they advise their clients badly in order to complete those deals? Logically, the answer must be ‘yes, sometimes’ – but generally the answer is ‘no’. If genuinely concerned, pension trustees should take care to vet and recommend those who advise scheme members and ensure the scheme/the employer pays to audit a sample of their work regularly. There is in my view plenty of criticism, but an absence of responsibility in that quarter. Lack of scrutiny is the main problem – not the form remuneration may take, nor the incentive of long term investment management work. Abolishing contingent charging will not improve outcomes – but it will restrict access to advice.

    • The trouble with suitability audits paid for by either the scheme trustees or the employer, over which the auditing body has the power to give a set of recommendations either the thumbs up or thumbs down, is that it would drag them into the role of being a provider of advice and provoke all sorts of challenges from the scheme member. I think my adviser is a good bloke, I think he knows what he’s doing, I am satisfied with his advice, I want to transfer, who are you to block my wish to do what I want with my money? It just wouldn’t work.

  7. If they are to ban CC , it should be banned for all ongoing as well.

    • Initial advice and ongoing service thereafter are, I suggest, two rather different things.

      Whilst I see irresolvable conflicts of interest with CC for the former, removing ongoing PFAC would mean invoices for everything and that, it could be argued, could compromise the availability of ongoing to advice to those who, having paid a fee for it, may well have received perfectly sound initial advice.

  8. CETV’s are only guaranteed for 3 months usually??

  9. Astonished to read IFAs stating that DB scheme benefits are guaranteed. They aren’t.

    • Well, thanks to the PPF, even if the scheme becomes insolvent, they’re certainly a lot closer to being guaranteed than benefits from a PP.

    • Surely that’s just semantics. It is a given that there are no absolute guarantees, even on government bonds. The value of the guarantee on a DB scheme, as with any guarantee, depends on the quality of the guarantor. It’s still a guarantee.

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