View more on these topics

Is judgement day drawing down?

Once again, the FSA is keeping watch on the income drawdown market, leaving some pension experts to wonder if pressure is building to the start of a review of sales.

As part of its follow-up to regulatory update 67, the FSA is asking income-drawdown providers for the names of their top 20 supporting IFAs, similar to an exercise that the PIA carried out in 1998.

Although the FSA says this information-gathering exercise is part of its routine work, some people in the industry believe the findings could be used as part of a sales review.

This will come as no surprise to those who believe the clock is ticking on a full-scale review for the product which has a reputation for high risk and high charges.

Annuity Direct director Stuart Bayliss says: “The FSA is definitely bringing this into closer scrutiny and it will get even closer. The regulator sees income drawdown as a high-risk product.”

The FSA has given no hints on whether it has an agenda other than getting to know the drawdown market better and says the information will be used “for a variety of purposes”.

But some major advisersin the market feel the time could be right for the regulator to turn its scrutiny on sales, particularly by advisers who are less prolific and not specialists in the product area.

Annuity Bureau director Ronnie Lymburn says: “If the FSA is planning checks, they should look at advisers who dabble in income drawdown, not the big players. If the FSA was to make visits, they are not likely to find evidence of misselling at the more established players.”

Intelligent Pensions managing director Steve Patterson says: “It is absolutely time for the regulator to give much greater focus to the commission bias against purchasing an annuity. In 1998, the checks did not focus on the issue of the ongoing monitoring and management of cases and whether IFAs had the systems needed for this in place.

“Responsible IFAs who only have two or three clients a year interested in income drawdown will recommend them to specialist IFAs but many non-specialist advisers who do not know enough about the area are dealing in it and are not regularly reviewing their clients&#39 investment strategies.”

Some in the pension industry believe the regulator has long been concerned over the big up-front commission payments that IFAs can take and there is suspicion advisers are being lured into recommending income drawdown over lower-risk alternatives such as annuities by the potential for higher financial gains.

The carrot dangling before IFAs to take clients into the drawdown route is that on a typical case of £100,000-plus they can earn between 5 and 6 per cent in commission.

Many advisers believe the work involved for many cases may not warrant such high rewards. They argue this area requires at least a look by the regulator.

Carrington Consultants director William Sallitt says: “For larger cases, it might be harder to justify large payouts when the same amount of work is required for smaller cases.”

Many of the biggest players say they opt for a different commission arrangement, which builds in ongoing financial planning for the longer term.

The Annuity Bureau takes between 2 and 3 per cent up front, reinvests the rest for the client and takes a trail commission over many years.

Other top 20 advisers, including Carrington Consultants, operate a similar structure.

Sallitt says: “For some advisers who take significant up-front commission of between 4.5 and 6 per cent, as opposed to trail commission, the regulator might be concerned.”

Patterson says: “Trail commission arrangements help guarantee the client is taking advantage of selective annuity purchase. If this is not checked, the client can be seriously disadvantaged and can lose as much as 50 per cent of the returns they could have had.”

While trail commission practices should reassure the regulator, the ABI figures which show decreasing case sizes have kept fears of misselling concerns alive.

ABI figures from 1999 show 16,000 drawdown policies were sold with an average investment value of £115,000.

This set alarm bells ringing as the received wisdom on drawdown is that investors should have a minimum fund of between £200,000 and £250,000 before even considering it an option.

Some IFAs also point out that the £115,000 figure isan average, suggesting that some drawdown policies are being sold to people with less than £100,000.

This suggests that the most appropriate advice is not necessarily being given.

There are other factors outside of intermediary commission which have fuelled increased sales, including consu- mers delaying annuity purchase because of declining rates.

But warning signs of misselling have been triggered by other factors such as the fact that a high proportion of drawdown clients are drawing the maximum income which is allowed under the Government Actuary Department &#39s rules.

Recommended

Charcol will take high-net-worth role in B&B plan

Bradford & Bingley is launching a two-tier advice strat-egy, with John Charcol and CharcolOnline advisers targeting higher-net-worth clients and B&B advisers left to service the mass market.The move is part of a mix-and-match distribution strategy which will see Charcol leading the way in the advice-based strategy.The strategy, revealed to Money Marketing by CharcolOnline managing director […]

M&E picks five for pension

Network M&E has finalised a stakeholder panel of five, with CGNU, Friends Provident, Scottish Equitable, Scottish Mutual and Standard Life winning places.Pension development manager Stuart Fairburn says the companies were chosen for the marketing support they can give members as well as for technology compatibility.He insists that commission “did not come into it”.Fairburn says the […]

FundsHub sets wheel turning for would-be supermarkets

For the sake of clarity, it is worth describing what FundsHub is not. FundsHub does not offer a direct-to-retail or IFA-based online fund supermarket carrying the FundsHub brand. Strictly speaking, then, we do not compete with Fidelity&#39s FundsNetwork, CoFunds or Egg.FundsHub is an independent provider of an outsourced fund supermarket solution. In short, we target […]

Bankhall moves to second place with 4,000 RIs

Bankhall has passed the 4,000 mark for registered individuals, making it the second-biggest commercial grouping of IFAs in terms of numbers behind Misys.The new total means Bankhall has more than doubled the number of RIs in a year thanks to its joint venture with Portfolio Member Services, the former IFA Portfolio.The whole Bankhall group now […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com