As Mark Knopfler once sang “Money for nothing and your chicks for free”, that lyric could so easily describe the new business commission culture that dogs our industry.
I remember when a company I worked for introduced an investment bond where the allocation exceeded 100 per cent. This meant it was possible to invest one week and disinvest the next, making a profit at the insurer’s expense.
The insurer was horrified when one IFA took advantage of it for himself, the practice was then blocked but it was very much a self-inflicted wound.
This habit of paying too much was simply a reflection of very strange accounting procedures which included the much liked embedded value method. This is where the provider could assume profits before they even had occurred.
As Ned Cazalet observed, this was not sustainable in the long term and yet it persists, it is the new business equivalent of the emperor’s new clothes.
We are still seeing uneconomic deals being struck in the group personal pension market and it shows no sign of abatement. This is despite the fact that the FSA has clearly stated it is observing market activity closely. I wonder why, with such a strong steer, some ignore the warning and carry on with business as usual.
Paying excessive commission on group schemes has long been a crazy idea but, given the focus on new business over profitable business (and no, they are not the same thing), it is little wonder its popularity continues to grow and the fact that level four may not be needed to advise employers will drive it even more.
Adviser-charging works on the principle that whoever gets the advice pays for it.
Imagine, if you will, a scheme with 400 potential members where only 50 join, who should bear the cost for the 350 who did not, they may have attended presentations or even had one-toone meetings? All that costs and if the employer is unwilling to pay, then those costs could have an impact that is far too heavy on the plan values of those remaining.
Apportioning adviser-char-ging and keeping on the right side of treating customers fairly without billing the employer separately for set-up is impossible. Few employers take advantage of the £150 allowance for tax-free advice and we, as advisers, need to bring it more to their attention.
The FSA has suggested that legacy schemes can continue under pre-2013 terms. This is great news for all the transactional junkies, all they need to do is to persuade an employer to set up a GPP for, say, five people and when auto-enrolment comes in, admit the other 400 under the transition rule. This will allow them to reap the commission as before, which is why the rules for transition are defective need tightening.
The fact that level four will not be necessary for those advising employers on corporate pensions may be an additional respite for the executive benefit consultants but is that something to celebrate or to despair over?
It seems crazy that you cannot advise the employees but you can advise the employer. I hope this omission was an oversight. In any case, this reprieve will be temporary and needs to be seen as that.
We need to encourage greater levels of contribution by all members and employers. Over-focusing on adviser remuneration is not helpful and means that benefits will disappoint and that needs to be avoided.
We need a strong viral message and that is only possible if we focus on benefits. That will result in higher levels of contribution which then trigger commission pre-2013.
The days of embedded value have gone so why the executive benefit consultants took the route of selling on the margins is beyond me.
The fact is they have and maybe that lack of strategic vision gives competitive advantage to others, primarily IFAs.
The clear absence of new schemes is of the most concern. We cannot have this merry-go-round carrying on as advisers continue to swap a scheme between a diminishing number of providers.
The over-emphasis on the front-end remuneration shape has dictated activity taking a similar form, as the employee benefit consultants focus on bigger schemes with little in the way of proactive education of scheme members, hence they seem more able to cope with level commission.
Neither of these approaches delivers benefit for the scheme members and this is where the TCF issues must lie.
Perhaps my opening reference to Dire Straits is the label for the situation that many pension advisers, including employee benefit consultants, now find themselves in.
Time is running out and if the regulator finds a fire sale has started, then they may just stop it early. They already spotted the contract v trust issue and dealt with it in the last paper they issued on group schemes. I am sure the legacy exemption will be the next one to bite the dust. Dire straits indeed.
Robert Reid is the managing director of Syndaxi Chartered Financial Planners