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Finding the right outsourced DB transfer specialist

Outsourced transfer advice is under scrutiny by the FCA. What is the safest solution for your firm and your clients? 

Soaring demand for defined benefit transfer advice has stretched adviser capacity to the max. And with over six million private sector DB members yet to retire, it is not going away any time soon. Even if you are not seeking new DB clients, the FCA has made it clear you must advise existing clients with DB pensions on what is right for them either way.

This has created a difficult issue for firms lacking the appetite – or permissions – to advise on DB. How can they best meet obligations to deliver the right outcome?

The nuclear option – of ceasing to act for the client – might seem the safest, however unpalatable. But there are alternatives. A well-structured outsourcing arrangement is one solution. But this brings its own risks, too.

DB transfers reach 100,000 a year

Outsourcing DB transfer advice, or pension transfer specialist sign-off, has been very much under the regulatory spotlight recently. Many of the DB advice failings unveiled by the FCA have hinged on “commoditised” outsourcing models that cut corners. This has resulted in some high-profile suspensions and voluntary withdrawals from the market. But that is not to say outsourcing cannot work.

FCA guidance

The FCA understands many advice firms – particularly smaller ones – do not have the permissions, expertise or appetite to do DB transfer business and need the option to refer clients to experts in other firms.

However, it has become clear from its investigations that not all outsourcing models have been well thought out.

Its latest DB transfer consultation (CP18/7) gives some useful pointers on how it expects any outsourcing arrangements to work. Crucially, outsourcing cannot involve any shortcuts. Outsourcing should result in more or less the same process as it would had the advice been given by one firm that fully knows their client.

When framing DB transfer advice, the same requirements to focus on the best way of meeting the client’s overall financial needs apply equally to outsourced cases and those handled in-house.

This means both advice firms need to work closely together to gain a full understanding of the client’s wider circumstances and avoid any advice disconnect. The transfer advice must take a holistic view and reflect the client’s attitude to losing income guarantees and any impact this would have on their ability to take investment risk.

Advisers targeted by ambulance chasers over DB transfers

It must also reflect the long-term intention for the client’s funds of the transfer proceeds, in particular the recipient pension vehicle, investment solution and charges likely to be put in place if the transfer goes ahead. In short, the holding adviser needs to take responsibility for establishing the product choice and long-term investment strategy most appropriate to meeting their client’s needs if a transfer is recommended – setting the client-specific parameters for the outsourced DB adviser to work to.

Nailing the legals

This requires a lot of trust and compatible operating models, so both parties need to undertake thorough due diligence before entering a partnership arrangement. The legal detail of who is responsible for what should be clearly documented, so that the roles and liabilities of both parties are absolutely clear to avoid disputes further down the line. It will be important to make sure the client understands who is responsible for what, too.

The FCA holds both firms responsible for ensuring this is done seamlessly, so it is in the interests of both to sort this out up front.

Ten issues with DB transfer files and how to solve them

Outsourcing to a DB transfer specialist can provide a workable business model and support good client outcomes where you lack the expertise or appetite to do it in-house. But you need to do it right.

Doing your homework before choosing an outsourcing partner, establishing a robust process by setting the advice parameters around the pension, investment solution and charges that will apply if the transfer goes ahead, and nailing down the legals of where the buck stops are the keys to success.

Alastair Black is head of financial planning propositions at Standard Life

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