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Neil Liversidge: Do we really know better than our clients?

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The late Sir John Templeton had 10 maxims for investment success.  Number 10 was that “an investor who has all the answers doesn’t even understand the questions”. Along with all the standard and risk warnings, we frankly tell every client that while we give advice in good faith we do not claim to be omniscient. Any adviser who thinks they know better than their clients is mistaking a matter of opinion, however well informed, for a matter of fact. 

Pension freedom, however, has suddenly imbued many with precisely that delusion. The good and the great of the industry are lining up to dictate we must “just say no” to clients wanting to cash in their pensions. We know better and so, the rationale goes, we are entitled to frustrate their legitimate wishes.

Recently I have told would-be clients with no need for a lump sum they are nuts to even think of cashing in their excellent final salary pensions. But a blanket ban on all clients from cashing in? They must be kidding. If after having had advice and having had the risks clearly spelled out to them clients still want to cash in and pay the tax that is their choice. Moreover if full fund encashments are to happen then far better they are well done by the best firms.

Consider two alternative scenarios. In the first the pension fund is released for an insistent client with execution by the firm that has advised against it. Every due warning is given, precaution taken and process documented. When the claim chasers try it on they will get nowhere. The firm won’t take a hit and neither will its PII or the FSCS.

Now consider the alternative: the “advice” is the minimal rubber stamp required to persuade the trustees to release the funds. It is given for a fat fee by a dinosaur relic. No records are kept and said relic’s run-off cover consists of a plan to run off to a villa in Spain. When his clients claim, the FSCS picks up the bill and, in due course, that means we do.  The best of the industry should not be hitting the chicken switch. They should be designing a set of standards and agreeing them with the regulator to minimise the risk to clients and firms alike. Banning firms from benefiting in any way from referral fee backhanders and suchlike would be a start. Only this morning I was offered cash to line up the gullible for “solar panel annuities”.

A final thought for those who think they always know better than their clients. The retiree who wants to cash in to capitalise his own new business might just know something you do not. One gentleman started his enterprise aged 65 with his first month’s pension of $105 dollars. His name? Colonel Harland Sanders. KFC anyone?

Neil Liversidge is managing director of West Riding Personal Financial Solutions 

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Comments

There are 31 comments at the moment, we would love to hear your opinion too.

  1. Very well put Neil,

    I read a report last week CAB have already had people in, who have been swindled out of their pension pots, one to the tune of 200k !

    Its been said before you cannot instil ethics with a big stick or by following a un-travelable path, those who are un-ethical will ignore and go round ! the rest limp on battered and bruised.

  2. I don’t think the issue is one of frustrating the legitimate wishes of clients to do what our professional judgement tells us is the wrong thing. The risk to the client is that if he spends a large chunk of his pension fund/s all in one go, in a few years time he’ll find himself with too little income. The risk to the intermediary who facilitates this, in the knowledge of the likely consequence, is that the client will be looking for someone else to blame and that the FOS doesn’t recognise insistent client as a legitimate defence. That stance is a matter of public record. All the warnings and disclaimers in the world won’t render the intermediary fireproof because the claimant, enthusiastically egged on by a CMC, will claim that he didn’t really understand what he was doing, that the intermediary told him the disclaimer he signed was “just a formality”, that the intermediary failed in his duty of care to impress upon him the unwiseness of his proposed course of action, that the intermediary was just after a quick buck, etc, etc.

    The bottom line in the eyes of the FCA and the FOS is that you, the intermediary, are responsible ~ for ever and a day ~ for the outcome of whatever course of action you facilitate. There’s no getting away from that.

    It’s the fact that no matter how hard

  3. Wouldn’t our lives as advisers be much simpler if we could just explain the pro’s and con’s of a decision to a client, hand them a document outlining the pro’s and con’s, recommend a course of action and be done with it.

    In reality, as Julian states, we do all of that but with the knowledge that the FOS can decide 5, 10, 15 or even 20 years later that we didn’t do enough.

    I agree with Neil in that we should be able to facilitate clients accessing their pension funds (or other investments) in anyway they like. Our job is to enlighten clients as to the potential outcomes and educate them in different solutions that they haven’t previously considered. Once we have done that what are we to do if ‘our’ client chooses the second or third best option or even the worst.

    Our SL’s have an addendum that states all the disadvantages of a chosen course of action and clients must sign to say that they have read and understood these points before we continue. Surely the FCA and FOS can put their heads together and come up with an industry standard for this type of document.

  4. I thought that it was our peers that were telling us that the public do not know best? 🙂

  5. @NeilLiversidge I think you are right that advisers should not think they know better than the client what the client wants. Obviously the client should always know better than the adviser what they actually want. However if a client is coming to an adviser it is usually to ask for advice on how best to achieve what they want. So if the client is paying for advice then that is what they get, and if after taking advice the client still wishes to proceed with a course of action against the advisers expert judgement then of course they should be allowed to do so. However, if the client wishes to then do something which a professional adviser working for one of the “best firms” does not support, I fail to see the logic of that adviser or firm then carrying out the transaction for the client. And if an adviser then facilitates a course of action which he or she has just advised strongly against I would seriously question how that then makes them anything other than a weak character. Where I agree with you is that the “insistent” client should still be allowed to do what they want, BUT they should then be given the ability to execute their own wishes direct with the provider/employer. This is something which George Osborne should really sort out as he created the mess in the first place, and then the regulators should sort out how clients ploughing their own furrow achieve their wish to move or cash in final salary benefits. It’s not an advice issue. You make the following comments: “Every due warning is given, precaution taken and process documented. When the claim chasers try it on they will get nowhere. Past practise does not bear your opinion out at all well, and I very much agree with Julian Stevens’ interpretation of how FOS would view warnings given to insistent customers. And at the moment our PI insurers are intimating that they will not cover any lost claims arising from customers advised on an insistent basis who subsequently claim they didn’t know what they were doing. Given that advisers are individually liable for advice, and given that there is no long stop, it would take a brave and possibly stupid adviser to help a client access their money in these circumstances. I don’t think I know better than clients what they want, but if advice is what they pay for then advice is what they get. They do not then get me doing something I don’t agree with for them at the risk of losing my house, my possessions and everything that belongs to me just so that they can do something I completely disagree with. The providers with whom they hold the pension can facilitate this kind of transaction with only a need to carry out a second line of defence process. And actually your comments about far better full encashments are done by the best firms is tosh. If your premise is that the client once informed can still do what they want even if they realise it is ill-advised, then what does it matter which type of firm does the full encashment? The pension scammers can still get hold of the people who have “the best” firms doing the initial encashment AFTER this has happened. SO how is it the “best firms” who do this? I don’t think your argument has any logic and cannot agree with you that advisers are chicken for not doing things they think are stupid. IF the FCA and FOS agree a set of standards and agree a form of wording which IS watertight in excluding insistent clients from making subsequent claims then advisers can then process this kind pension transaction if they really want to. But until then its not chicken its just common sense to stick by your advice. Advisers should not want to be paid for doing things they don’t agree with and their clients should respect advisers who are open and honest about what they will and will not do.

  6. Yet another occasion when Neil’s writing leaves me open mouthed.

    It isn’t necessarily knowing better than our clients (but invariably the good advisers do). It is a matter of a client coming to us for advice.

    If a couch potato goes to a doctor and is advised to take more exercise and eat sensibly would it be acceptable for the doctor to let that person continue with bad habits because that is what they want to do?

    Your antipathy to the idea of just saying no rather smacks of the desire to do business at any cost. We all make judgements in life and if we think that someone is an idiot or doing the wrong thing and they won’t take the advice that have come to us for, then I really can’t see a problem of telling them to take a walk.

    Indeed there is a better way. If they come to you for advice – let them know that you will compile a report – that report is what they pay for whether they take the advice or not. You can then tell them no and still get paid.

    Indeed that is what I did on more than one occasion when people came to me for investment advice and they still had a mortgage paying 7% interest. I suggested they redeemed the mortgage and if there was anything left – keep some in cash and then invest any balance. It was the advice they paid for being told before commencement what the charge was going to be. This pension business is in the same category. If they don’t want to follow your advice the can walk away – but you have still been paid.
    Personally I think you are making heavy weather out of nothing.

    In fact the real problem is that in many cases the bureaucracy in our field makes it difficult if not impossible for clients to do it for themselves. If they want to be daft then why can’t they just make their own arrangements? That would save all this agonising and crocodile tears from advisers. Indeed you can’t even buy an open market annuity without putting through an intermediary.

  7. I agree with Brian Gannon although I understand what Neil is saying about advisers not knowing better than our clients, but FOS & PI is the issue here.I will stick to me 6 levels of advisable to lunacy and decide where an action appears on that scale and whether I will implement.

  8. @HarryKatz, this is getting ridiculous, I agree with you for the third time in less than three months, and Phil, we seem to agree with each other on pretty much everything, which is less worrying to me.

  9. We dealt with an enquiry this morning from a chap who has a £400,000 CETV from a DB scheme that he wants to transfer to a Flexi Access Drawdown account. We quoted our usual advice/implementation fee to him and confirmed that if our advice was that it was against his best interests to transfer we would certainly not be implementing it for him (he gets to pay for the advice delivery regardless of outcome).

    He came back and said that he doesn’t really want advice he just wants us to sign off that he has received advice. He even gave us the wording to use

    “I can confirm that XXXXXXX has taken advice from us when considering the transfer from their Defined Benefit Scheme to a Defined Contribution basis. We are a professional financial adviser, authorised by the FCA and are independent from the defined benefit scheme”.

    I think our PI insurers would have kittens if they thought we would implement something that we advised against, quite rightly so

  10. Without such a statement summarising just what the advice was, I can’t see how it’s likely to be of any practical value whatsoever.

    If the advice was that what the client wants to do is sound, he wouldn’t need a statement to show to anyone else because you’d (almost certainly) implement it for him. So, by default, a statement from a regulated intermediary to the effect that advice has been given but with no further involvement is a pretty strong indicator that the advice was not to do what the client has said he wants to do.

    So why would any scheme or provider accept that as a green light to facilitate transferring the value of secure DB’s to a DC plan (or indeed just cashing everything in)?

    Steer a mile clear and send such people on their way.

  11. “The good and the great of the industry are lining up to dictate we must “just say no” to clients wanting to cash in their pensions.”

    Simply not true. They are advising you but, just like your clients, you are free to make your own choice. Just don’t expect ‘the good and the great’ to stand by you and help you implement this course of action if that’s the path you go down.

    Let’s just think about a few simple facts.

    1. There will be some unjustified complaints from clients where they were advised against a course of action but the adviser implemented anyway.
    2. There will be some justified complaints from clients where they were advised against a course of action but the adviser implemented anyway.
    3. The FOS will have the job of deciding which is which based on criteria we can’t fully know but will include what the client tells them and what’s ‘fair and reasonable’ in THEIR view at THAT time.

    If you implement against advice you are placing your trust in the judgement of the FOS. The FCA may also have a ‘say’ about the issue which could influence the FOS in their future decision making.

    Much has been made about what is right or wrong, whether we should do this or do that. None of this matters, it’s simply a personal business decision. If you want to base that on your own personal ethics fine, but it won’t be a factor when the fan gets a sniff of the do-do.

    If you decide to help clients implement against advice there’s no regulation stopping you so go ahead. However, if it goes horribly wrong then please don’t come crying later saying it’s unfair. Consider yourself advised.

  12. @GreyArea succinct and very clear. The trouble is that if too many advisers make their own decisions to process this business and too many FOS rulings go against these people it is still going to lead to a massive cost for those who choose not to process such business (due to much higher levies). So we need a clear unequivocal process for clients (and maybe advisers) to follow where they decide AGAINST advice to proceed anyway.

  13. Its the client money! Pension “freedom” means just that, the freedom to be an idiot and freedom for the client to ignore advice and make a mistake just as they have the right to refuse resuscitation, climb mountains, race cars or smoke.

    The issue is that the adviser should also have the right to a disclaimer form future litigation from the clients actions made against advice when the complaints come in fired with the benefit of hindsight.

    In this respect this debate is all down to poor regulation and the “outlawing” of the financial adviser forced to operate outside of the normal conventions of commercial and contractual law because it suits a corrupt system to have a whipping boy with an open cheque book.

  14. A different slant on the one of the basic principles of giving investment advice.

    Scenario 1 – a client wants to invest £20,000 but has £20,000 of debts. Would the advice be to invest or clear the liabilities? Usually the latter (I would hope).

    Scenario 2 – a client has £20,000 of debts and also has £20,000 invested. Would we advise encashment and repayment of the liabilities?

    Scenario 3 – the investment is held in a pension fund – accepting that tax might be payable, as long as the client is made fully aware, what is the difference?

    Scenario 4 – Even if the client has no liabilities but wants to spend accrued ‘savings’ whilst it can still be enjoyed, what is the difference whether it is in ISAs, bank accounts or a freed-up pension fund?

    The government legislation has, overnight, removed the word ‘pension’ from our vocabulary. It has equally removed the area of retirement planning from financial planning. The public is now able to plan for their ‘futures’ – retired or not – and enjoy the fruits of their savings however and whenever (within age limits) they choose.

    This is now the new regime in which we operate but provided we still conduct ourselves ethically, providing advice which is right for the client; informing them of the risks and fully and accurately documenting it, there should be no significant changes.

    Sadly, we are a paranoid profession – for very good reason based on historical evidence – but we prevail for the benefit of our clients, and if we decide to defer from providing this advice going forward then we will not be doing our clients a service. Many commentators have emphasised over recent weeks the importance of completing a full and robust file. We should all be experts at doing that anyway – the new rules just require that we continue to do so, albeit, with a few more health warnings etc. If it is the right advice for the client conduct the business, if it isn’t – don’t.

  15. @GA – Taking that a step further, if the PFS is the issuer of your SPS and a complaint is upheld against you by the FOS and you have acted contrary to the guidance from the PFS, I would hope and expect the PFS to refer the matter to it’s ethics committee when it comes to renewal of an SPS and to then consider declining to issue one.
    as I have said before, one of the advantages of NOT having AF3 or perhaps having AF3, but not applying for permission with the FCA is you cannot give or implement advice on DB to DC pension transfers, so the advice is cleanly separated from the implementation etc if you refer to a separate firm who specialise in Occ transfers. If the client is insistent, their should be a clearing house system as Billy Burrows has suggested so that the consumer can transfer and then once carried out choose an adviser to advise them going forward once they have done what they have been advised not to.

  16. I’m with Neil on this and also ‘Paul’ above…. my anecdote is along a similar vein but (for example) the pension is being cashsed in to (a) fund a cruise (b) pay for life saving care for the clients child (c) pay for life saving care for the client … etc.

    The fact that it’s coming from a pension is (now) irrelevant – if it was coming from an ISA would we moralise over the end use?

    Once we establish Aims and Objectives our job then is to advise accordingly. Whether we disagree with the A&O is not something we should overlay onto the advice…. unless they have come for our opinion on the A&O.

    Would we advise someone not to save into an ISA in order to fund a holiday of a lifetime in 10 years hence? In 10 years time, if money was tight, we’d perhaps make them aware of the risk of blowing it on that objective – but would consideration really be given in refusing to sell the assets to provide the funds for the purpose they needed? Likewise, due to legislation change, a client’s A&O may now be to do the same with a pension and I do not see how the situation differs (i.e. raise the warnings and advise accordingly but, ultimately, it’s the clients A&O and cash).

  17. @Brian Gannon
    I agree, it’s not an ideal situation for anyone.

    @Simon Mansell
    I refer you to the comment I made some moments ago. As far as I’m aware the client freedoms haven’t been questioned.

    @Paul and @Paul Stocks
    Advice in itself isn’t the issue. The single issue is, having given advice, should you implement an action against your own advice. Neither, to a large extent, is a client’s A&O an issue. Even if they come to you and say “I want to do X regardless of the consequences” (in which case they aren’t really seeking advice) you will, I asume, give a balanced recommendation anyway even if against their stated their A&O.

    @Phil Castle
    I like your thinking but it’s just guidance from the PFS not a dictat. That said, it’s possible there may be instances where implementation was considered unethical and the member would have to answer for that. No doubt someone will bleat about their rights and why should a professional body have a say – in which case, apply your logic to doctors and ask if you’d want to be treated by a surgeon who has shunned the RCS because they don’t agree with his methods… thought not.

  18. @Paul – The issue is the risk of the FOS finding against us and/or PI declining to cover implementation contrary to advice. All I think the PFS and other bodies is saying is make sure you separate the advice issue from the implementation side of things and there are many ways that can be done.
    We as a firm have a very small client base now and pretty much know our clients inside out, so hopefully my 1-6 scale in my head of advice v stupidity and where to draw the line at implementation will continue to suffice.
    The fear as an industry is that some advisers will not think carefully enough, do big cases which then result in an upheld complaint which collapses their company dropping the liability on to FSCS and in turn to those remaining in the industry via the FSCS levy.
    If we distance ourselves and leave it to the provider to implement something contrary to our advice, then the provider part of the levy may get caught, but at least the advisory sector will not.
    I am as we speak reading the wording from a provider which they are sending to consumers who have declined guidance and/or advice.

  19. @GA – Pre RDR I had about a year or so of NOT being a member of a professional body when it was implied that to obtain an SPS you’d have to be a member of a professional body as in order to trade it would then make signing of an ethics code meaningless as some people will sign anything when it becomes a choice between working or not. Fortunately the F-pack saw sense and did not make membership of a professional body mandatory and whilst the CII will not issue an SPS to a non member, there are professional bodies who will. Once that was sorted I re-joined the PFS. One day I may well be I breach on an ethics code as a result of being rude to someone, in which case I will have to decide whether to apologise or take my punishment/get an SPS from someone else. The irony is that under the current situation, if all professional bodies refuse to issue an SPS just because you are rude and obnoxious, then the FCA have to work out what to do about it 🙂 as they may have to issue one if you are fit and proper etc….. and just have no bedside manner i.e. rude, crude and obnoxious as there is no law against that (yet).

  20. headbelowthe parapet 17th April 2015 at 6:23 pm

    We love to get our knickers in a twist about stuff like this don’t we?

    I wholeheartedly agree with Neil, and we should remember that a pension fund isn’t a pension fund in the conventional sense any longer – it is a savings vehicle with some tax efficiencies. Everyone seems to be too scared to think up any sensible conclusions.

    The government has introduced freedom and choice in pensions and a very high proportion of the public will want to take advantage of that freedom. In addition, if a person takes advice and decides against that advice they do actually have the freedom to do so even if it is to their own detriment, indeed this freedom to make unwise decisions is enshrined in law.

    We can advise clients to take a particular course of action, and point out why it is a better option than any other; but, if a client choses to take a different course that is their prerogative. I believe we should articulate the financial consequences and measure the effects, and then ensure that the client understands what they are getting themselves into.

    I would be uncomfortable telling a client they are stupid and that they should bugger off!

    If a pension client insists on making their own decision (horror!), which is likely to become more prevalent then I believe a new process might be required: I suggest a presale report (the advice) and a meeting to discuss the report, followed by a period of time (a cooling off period of say, a week) for the client to consider their options, your advice and the financial consequences of each particular course of action (or combination thereof). If the client then wishes to ignore your advice, they would need to be able to write you a brief letter explaining why, and acknowledging that they then have no recourse to the FOS. The advice should be viewed as a separate from the implementation, but why should you not charge for both elements? There are a number of FOS decisions that have not been upheld when similar processes have been used.

    Most of the guidance from compliance consultants and SPS providers concerns DB schemes, but it seems that this has been overlaid on personal schemes too and that has made for much of the noise on this and other forums.

  21. @Brian Gannon

    I didn’t realise that I was quite such an awful person! But hey! agreement once a month – I must be getting mellow!

  22. @HarryKatz one doesn’t have to be awful or even unpleasant to have disagreements but mellow is good for sure. Maybe I should retire too, I could do with being less angry about our regulators.

  23. If it is a “new” client who seeks advice and then become “insistent” because they do not accept what you have recommended then walk away and make sure they pay you for the work you have done.

    If it is an existing client and you are their trusted adviser then why would they not accept the advice that they have been given. As the adviser however you will have a much deeper understanding and knowledge of the precise objectives of the client and may be in a much better position to reach a mutually agreeable outcome (either way). In this case there will be no “insistence”….

  24. @Jabba – I pretty much think what you are saying about existing clients versus new clients is what many advisers are likely to do.
    It is the worry that there may be some advisers taking on new consumers on a transactional basis who then process an insistent consumer and the liability then ends up falling to other firms via the FSCS in the future as may have happened with the pension review cases.
    I would argue if they are insistent, they shouldn’t be allowed to deal through an adviser, they should have to go to the provider direct. AFTER the provider has prcessed the insistent client, if they want investment advice at a later date, that is a spate issue.
    Providers already have a checklist for consumers who have declined to take guidance or advice. The Hawthorne’s one looks quite comprehensive.

  25. @headbelowthe parapet
    Asking a client to acknowledge they have no recourse to the FOS is wrong on two counts. Firstly, it can’t be the case becuase they can always complain regardless of whether it’s legitimate or not. Secondly, it’s a breach of the rules to attempt to deny a client that potential right – see COBS 2.1.2R

  26. PC….absolutely.
    The words “insistent” and “execution only” have no place in our world as they represent a transactional relationship which should have ended post RDR. FOS/ FCA have made it very clear how they view this approach and anybody who ignores this is tempting fate!

  27. headbelowthe parapet 20th April 2015 at 2:34 pm

    @ Grey Area

    I’m not suggesting that a firm deny the right to the FOS, I’m suggesting that we point out that an insistent client doesn’t actually have any recourse to the FOS as they are insistent on doing something against our advice. This then should fall under COBS 10. COBS 10.3.3 clearly shows that the regulator considers that an insistent client is the same as an non-advised client. That said, anecdotal evidence does seem to show that the FOS are inclined to ignore the rules.

  28. @headbelowthe parapet
    COBS 10 is for non-advised clients. It sort of works if you’ve never advised the client. However, if you have advised the same client at any time then it’s difficult to see how this would apply. In any event COBS 10.3.3 which you quote says:

    “If a client asks a firm to go ahead with a transaction, despite being given a warning by the firm, it is for the firm to consider whether to do so having regard to the circumstances.”

    Hardly encouraging. Added to which it’s guidance not a rule.

  29. When it comes to rules and regulations, yes, we do know more than our clients.

    The ” freedom for all bandwagon ” is easy to jump on, these days everyone is claiming that their human rights are being violated, but when things go wrong it is never their fault and somebody else has to pay.

    Society has to have rules to protect the public, what if we were allowed to drive our cars at 150mph because we had powerful cars and thought we were safe to drive at that speed? The consequences of actions are not thought through, this is what we do as advisers, within the regulatory framework which sets the rules for consumer protection, it has nothing to do with wanting control.

    My message to the do gooders is simply that they can do what they like, as long as they pay the bill later on, we all know that will not happen, they will either phoenix or disappear, leaving the sensible advisers to pay. I agree with most commentators, our own clients will probably accept what we advise, if we turn down a potential transactional client then what have we lost? Nothing of any value.

  30. Here is a live example of what goes on at the moment.

    An investment manager approaches my firm wanting to transfer from a DB scheme, the CETV only has three weeks left before it expires. Clearly he has been shopping around but does not tell us. Feedback from other managers at his firm suggests that they are being quoted hefty fees, most of them have £1m plus transfer values.

    He then asks if we will charge for the report even if it does not go ahead – yes, a charge for the report then another for implementation and business risk, he agrees to the fee.

    We then find out he has already completed the paperwork with his SIPP provider, but they will not proceed without a positive recommendation and a copy of the TVAS. Had he told us that another firm would handle the transfer our fee would have been lower, so hard luck for being less than honest.

    The TVAS comes back with acceptable numbers, on the balance of probability he could be better off and have more flexibility. This allows me to support the request to transfer and we send the required copies to the SIPP provider.

    Even then their compliance department has taken issue with the fact that I did not use the word ” recommend ” in my report. Quite clearly I did not recommend the transfer, the client had already decided he wanted to do it and required my positive affirmation, which I gave after due consideration.There is a difference between recommending a course of action and supporting a course of action.

    In the final analysis we have done business with someone who probably does not value our services, will never be a client, and was less than honest in his dealings with us. I would rather spend time on a more deserving client.

  31. @Geoff Sharp

    Succinct, pithy and spot on. Pity you didn’t write the article.

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