Cashflow modelling and a meticulous approach to risk are essential to avoid a suitability crisis
The debate about whether or not defined benefit scheme members should transfer out continues on its rollercoaster ride.
There are so many facets to the discussion and FCA guidance, although useful to an extent, is still not sufficient to make me trust that properly considered advice given now will not end up as the subject of future claims.
Some firms have plunged themselves into the DB transfer market and there is undoubtedly money to be made. However, I remain sceptical about the advisability of transferring in the vast majority of cases and am adamant we will almost always advise against it.
Let’s face it: those who have built up considerable DB pension benefits are often those who have been safely employed by a single large employer for many years.
They are frequently not risk-takers and are used to a steady, reliable income stream.
A DB transfer may be a fundamental shift in mindset for them and it is absolutely essential to adopt a defensive, cautious approach to your advice if they present with limited knowledge and experience. Anything less and you are inviting future unsuitability claims.
That is not to say we will not look at the feasibility of a transfer. Transfer values remain at an all-time high so, yes, in some cases, it will make sense. The point is that the client’s options must be thoroughly explored.
The FCA has confirmed these decisions must not just be based on critical yields but that we must also consider potential returns on new investments made with the transferred pot. I absolutely support that requirement and would go further: a full exploration of future scenarios through cashflow modelling and education about risk are critical.
Unlike many firms, we are not promoting our DB transfer service and will only accept the responsibility for evaluating a case on the basis of a fully advised process.
Importantly, we are charging a fee irrespective of the outcome of the advice process, so clients must accept they will be charged even if we recommend they leave their DB fund in situ.
Both the process and the fee are inflexible and we will not execute a transfer if we have decided it is contrary to the client’s best interests. Stressing this to the client at the outset helps reinforce the message that this is a really important, life-changing decision and our advice is ignored at their peril.
I am aware some firms are outsourcing the DB transfer report creation, then advising the client on the basis of that.
This seems to be a muddying of the waters that will just make future claims both more likely and more complex. Who is later liable for the advice given?
I am also concerned some advice firms are advising on the DB transfer without taking on the client’s ongoing advice needs. Again, this is splitting the responsibility for the advice.
Would a future claim consider the transfer itself or the ongoing investment strategy responsible for failing to provide sufficient funds for the client’s long retirement? It is likely one adviser would blame the other.
DB transfer decisions remain the single greatest risk to the advice sector. I am certain they will come back to bite us in the future.
All we can do is be meticulous in the way we handle any requests, act with professionalism rather than giving in to overriding commercialism and, sadly, charge a fee that reflects the risks we are taking even discussing the topic with clients.
Carl Lamb is managing director of Almary Green