When I read technical articles on pensions, I often wonder how well prepared the average IFA is for their own retirement. With an average age in the mid-50s, the industry will see a whole wave of retirements in the next five years.
Allow me to assume that the average IFA does not pay the maximum contribution into a pension. Faced with a shortfall in retirement provision, an IFA practice's stream of renewal commission looks the easy candidate for a replacement.
Of the IFAs with whom we have regular contact, most are looking to build up a renewal stream for an eventual buyer. But finding a buyer is going to prove more and more difficult as it is becoming increasingly hard to separate the benefit of the renewal stream from the burden of the advice liability.
The case of Glaister Greenwood clearly creates a lifetime liability and any IFA with long-term clients is at risk from a claim. If the regulator reviews standards in years to come, the costs and compensation will nearly always fall on the acquiring IFA.
The FSA does not want people to receive renewal commission when they have done nothing to be entitled to it. No servicing of the contract will mean no renewal commission. No authorisation will mean no FSA number, which will prevent providers making payment of renewal commission.
This scenario will not happen overnight as the average product provider has trouble getting its renewal payments correct at the best of times. What are the solutions?
A new idea gathering pace is the use of a special vehicle to collect renewal commission and pay it out on a securitisation of income or dividend basis.
There have already been a number of offerings in the market which try to cover this problem. Most are single-faceted and do not deal with both liability and payment issues.
Another problem is that in order to prevent a renewal stream from dying, you need to nurture it. Bluntly, the average IFA does not trust another IFA not to transfer clients to another agency or switch contracts to another provider.
The new-style vehicle operates on one of two bases.
The renewal company holds the commission of the retiring IFA under a sub-agency. The stream of renewal commission has professional indemnity cover applied to it before being split between the retirement service provider and the retired IFA.
Securitisation allows the commission stream to be directed toward family relatives. In fact, the rights under the securitisation can be transferred anywhere. They could be used as security for loans and/or capital drawdown.
The beauty of this type of arrangement is that the renewal company will have an associated advice company, which will host the adviser which services the clients. This idea works as the adviser is covenanted not to transfer agencies and/or to pay over commission where a policy is replaced or surrendered.
Achieving much the same result, this share-based structure issues a new class of share to each retiring practice. This type of structure allows the IFA to hold the shares which declare the dividend.
Such share-based schemes are very flexible as they allow the retiring IFA to place the dividend stream in trust and/or transmit it to another buyer for value.
A buyout is very ineffective if the vendor carries an open-ended indemnity on future claims and reviews. In theory, they could end up paying more back in claims and review costs than they received in the first place.
On the other hand, why would a purchaser buy a practice which could land them with all the review and professional indemnity costs? The balancing act between the two competing interests means that retirement planning must include a closing-off from liability.
What if the vast majority of Isa clients do not buy a Cat-standard Isa? Imagine that, at some point in the future, these sales become subject to a review. The average IFA has hundreds of Isa contracts within their client bank. The cost and time of a review would be horrific.
Never say never, as no one predicted the pension review. The nature of the IFA market means the detached exit will favour all parties concerned.
The need to plan succession is acute. If you are a purchaser, would you want the rev-iew risk? For directly authorised IFA practices, the options would be to create a securitisation or dividend vehicle for acquisition purposes. These are interesting times, so be creative and plan ahead.
Gareth Fatchett is principal at ProAct Legal