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Small firms facing business dilemma

How does a small, specialist IFA firm respond to the challenges created by the introduction of stakeholder?

At Informed Choice, we have identified the following issues as the challenges that need to be addressed.

Should we attempt to become a major player in the stakeholder market and what impact will that have on our business goals?

Can we grow our business by participating in the stakeholder market and continue to deliver the level of service we currently offer to customers in relation to products such as group personal pensions?

Might a better alternative be to rethink the way in which we deliver added-value services and focus on employer services only?

Can technology really deliver cost effective customer service and allow us to participate in volume sales and low margin products?

Should we ignore the market altogether and focus on added-value services in a specialist marketplace, for example, Sipps, pension transfers, income drawdown or investment planning?

As I have stated many times before, I have yet to see a business model that convinces me that a small IFA firm should actively embrace stakeholder pensions. Instead, the best course of action seems to be to re-engineer the business and focus on different markets. That said, there are a number of things that can be done to take advantage of the changes that are to take place and the following is an account of our progress to date.

Many of our existing customers will be affected by the introduction of stakeholder pensions and we definitely want to be the preferred supplier of advice about what they should do.

We have written a guide to stakeholder pensions which answers many of the key questions raised both by employers and employees. Rather than incurring the manufacturing costs of producing a paper version of the guide, we are making it available in the form of an email attachment only. This means our customers can either read it off screen from their own PC or print it off in the volumes they need.

We are not charging anything for the guide.

To address it to a wider audience, we have also linked up with a stakeholder service provider which will be offering services to product providers and employers. It expects its web site ( to be visited by many employers and our guide can be downloaded from its site. In addition, it has a link to our web site so enquiries from employers can be directed to us.

It is our intention to provide advice to employers about the impact of stakeholder pensions on a fee basis. One of our strengths, we think, is the provision of cost-effective plain English explanations in the form of written reports.

Without a doubt, the introduction of stakeholder pensions is having the desired effect of driving down the cost of personal pensions. While we have always preferred the payment for our services to be in the form of fees, it is still the case that, for many customers, the commission route still represents good value for money.

We do not want to waste our time on any self-interested debate about fees versus commission, all that matters is the test of price and service.

Can we deliver the kind of service the client wants within the commercial restraints of the revenue we receive? With fee charging, it is not too difficult, it is simply a question of setting the fees and identifying and describing the service. The client can then choose whether to pay and get the service.

With commission, it is slightly more difficult. Commission is generally seen as a reward for sales rather than a payment for service. Whether you agree with this or not, it is the customer perception that counts. We have therefore established a fee scale for stakeholder, directly charging a fee to the employer for the selection and establishment of a stakeholder plan.

In addition, we directly charge a fee to individual stakeholder pension members for non-standard services. We will do this in the expectation that stakeholder providers will provide the necessary mechanisms for bringing members into the schemes and providing standard information.

If the regulators and Government are right and people will be able to join stakeholder without advice in the vast majority of cases, then our model will probably be effective.

If face-to-face advice is needed for members it can be paid for by them or by their employer. Where fee resistance exists, we have a choice either not to provide the service or to determine whether the commission that is available is sufficient to cover our costs. We would prefer not to have to make the comparison but in many cases there will be fee resistance.

We also need to take into account that, for many employees, the worst financial decision they will make in their lives will be to join a stakeholder plan. If, by building up a modest pension fund, they deprive themselves of state benefits in the form of the minimum income guarantee, they might have been better off simply spending and enjoying their money. By providing no advice to employees, we might avoid the future risk of miss-selling accusations.

In any event, a basic-rate taxpayer without any employer contribution is probably best served not buying a stakeholder or personal pension. For the evidence for that contentious statement, simply read Occasional Paper Series 8, Saving for Retirement, How Taxes and Charges Affect Choice (issued by the FSA in May 2000) and you might also conclude that “a basic-rate taxpayer can expect a greater return from investing in a Catstandard Isa than in a medium-charged personal pension”.

Should a small, specialist IFA be embracing stakeholder? My advice is to be very careful. It might also be the worst financial decision you make for yourself and your clients.


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