There can be no doubt that the effect of the removal of commission on group pensions will prove devastating for some advisers. It is impossible to tell how many firms will find this a fatal blow but it would be naïve to imagine every firm is going to come through this market upheaval unscathed.
There are still too many variables at play to be able to settle on a precise figure. But it would be wrong to pretend that some firms will not fall by the wayside and that some RIs within firms will be found to be no longer economically viable.
The most pessimistic predictions I have heard from life offices are that some adviser firms will lose two thirds of their revenue if commission goes completely, with an average of a third of revenue disappearing across the board. These numbers may ultimately prove to be too high, although I have had advisers concur, and are presumably calculated on the basis of advisers doing nothing to adapt. But even if they are 20 per cent out, advisers need to heed the warnings.
The pressure has been eased since Steve Webb pushed the timetable for implementation back by 12 months. That gives many firms and individuals within them time to rethink and retool. And we are yet to see precisely how a ban will be implemented, or the length of any sunset clause.
The great unknown of auto-enrolment will also provide much-needed respite for those affected. Revenues from fees from the tens of thousands of new clients that will be created in the next year alone will doubtless fill some of those balance sheet gaps.
But for certain firms which have placed a lot of product on a once-and-done basis, taking large amounts of commission without establishing a long-term, sustainable proposition with their employer client, the maths is going to look very different in the future. Paying consultants large salaries and bonuses for winning lucrative pension business has gone forever and firms which have been using their existing commission stream to subsidise their building, salaries and other outgoings are going to have to take some difficult decisions.
For this type of commission-based pension adviser, this is RDR Mark II. Where the FSA had clearly said that historic commission and commission on new joiners and increments was OK, the DWP is now saying it is not. The furore over the U-turn on consultancy charging, barely 12 months ago, seems like an insignificant tiff compared to the tremors currently shaking the foundations of some advisers’ business models.
There will still be pension consulting to be done, not least where providers refuse to pass on all the gains from the removal of commission to their clients. But without commission there to grease the wheels, there will be less of it and the fee chargeable will be considerably lower.
Providers have been paying hundreds of millions of pounds a year in commissions on group pensions. Getting employers to pay this is going to require major efficiencies within corporate advisory businesses. The bigger firms should manage this transition more easily. Big employer clients will be more comfortable paying a fee.
It is at the SME level where advisers will feel the pinch. The Pensions Institute picked up on this point in its recent value for money in DC report, arguing both corporate IFAs and EBCs will face a squeeze on revenues.
How this revenue is replaced will ultimately come down to how employers respond to paying fees. Aviva expects as many as 50 per cent of employers sponsoring schemes it runs to respond to adviser requests for fees by dealing direct with the provider.
Some argue that once the employer realises the complexity of what they have to achieve, they will re-engage with their adviser. But the terms will be different – auto-enrolment is more about project management than about consultancy. And for some individuals this will mean a big change in the day to day.
John Greenwood is editor of Corporate Adviser