Despite only looking at 88 transfers, Financial Conduct Authority (FCA) research on defined benefit (DB) pension advice published last week told us a lot.
It revealed the regulator is concerned about DB transfer advice, with less than half of cases it reviewed deemed suitable. In fact, 17% of cases were viewed as unsuitable. The suitability of the rest was deemed unclear.
The research also revealed advice firms have been swamped by DB transfer requests. Many have struggled to meet the three-month deadline to make a transfer offer.
However one thing was missing from the regulator’s summary: any mention of contingent charging. This is important, as evidence of a ‘conflict of interest’ is emerging on certain DB transfer advice models. Imagine if, in the 17% of cases the FCA deemed were unsuitable, the adviser had only been paid if a transfer had gone ahead.
As one tweet I read said: ‘There’s an analogy with kids and sweets somewhere.’ In other words, some advisers could use the growing demand for DB transfers to make a quick buck by ticking off every request that comes their way, whether it is suitable or not.
Last month EQ Investors’ chief John Spiers called for a cap on advisers’ DB transfer fees. In theory this would dull the incentivising effect of charges on recommendations to transfer.
But there are limitations to this approach. As one IFA pointed out to me, a 1% ongoing fee on a transferred pot could represent ‘amazing value’ while a 0.6% fee just for a valuation-style review could be terrible.
Another good argument is that the very idea of a cap treats transfers like a commodity. In fact the appropriate charge depends entirely on the circumstances.
But what I think Spiers was calling for, asking firms to impose a decency limit on their transfer charges, can only be good for the profession when you look at the growing public demand for a DB transfer.
The forums of Citywire’s consumer website Citywire Money are full of people looking for an adviser to ‘sign off’ a transfer for as little money as possible. Contingent charging will only damage the reputation of advice in the long run.