The whole retirement planning sector has been on something of a roller coaster for nigh on two years.
One of the big personal finance stories of 2018 was savers dashing to exit their Defined Benefit (DB) pension schemes. For the 2018/19 scheme submission period, there were approximately 210,000 individual transfers from DB schemes, according to The Pensions Regulator. That was nearly three times the figure for the previous year.
But, last year, a dip came after the regulator cracked down on unsuitable advice and the cost of insurance for advisers rocketed. This year, of course, the devastation wrought by Covid–19 has reportedly deepened the decline in transfers.
I believe the Big Dipper carriage, to stretch the metaphor to its limits, has reached its nadir and we are heading towards another rising rail on our rollercoaster because advisers are now psychologically more positive about the market.
A key triggering moment for this has been the regulator’s recent announcement last month on its ban on contingent charging (CP19/25). That same regulation was, without doubt, a contributor to the negativity. But now that the Financial Conduct Authority (FCA) has removed uncertainty around the issue, rendering the road ahead a little more certain, advisers are thinking about how to navigate the concerns they had.
Those DB concerns that weakened the market
Contingent charging, as you are no doubt aware, means a client only pays for the advice if they go ahead with a transfer. The FCA said by introducing this ban, which comes into force on October 1st 2020, it will remove the conflicts of interest which arise when a financial adviser only gets paid if a transfer goes ahead.
Financial advisers also had another worry – that the regulations surrounding DB transfers would prove too difficult. Many had been triaging clients out of the full advice process when they were likely not to be recommended for transfer with various opaque processes.
The FCA responded by ruling that any advice on DB pensions had to follow proper regulated advice processes, including a detailed fact find and resulting in a suitability letter recommending a transfer (or not) and setting out the reasons. Any triaging that weeded out likely ‘no’s’ from an advice process could not include personalised advice, the FCA said. It could only be generic – in other words guidance, not advice.
A key part of the latest announcement has been the dawn of ‘abridged advice’, which will identify those who should definitely remain in a DB scheme, in order to keep advice costs low for those members. This could involve a series of questions which then determine a “no” quickly and at a cost more like £500 than £5,000.
In my role at Wealth Wizards, I talk to advisers almost every day. Following the regulator's announcement, they are wondering how to get back into this huge market. Yes, they still worry about the profitability of a system that will root out many more clients than those that proceed to full advice. And, yes, they worry about how abridged advice could be implemented in a way that satisfies the regulator, while offering a revenue stream. But they’re looking for solutions – and there is one.
The future of DB transfers – ‘algorithmic abridged advice’
This is software that enables financial advisers to implement a digital abridged advice service cheaply, quickly and consistently. It automatically filters out clients who are unlikely to be recommended for transfer without requiring the time and expense of a full advice service. Crucially, this allows a predictable margin for firms whose client has automatically been exited, quickly, to a “no”.
It can play part of a three-stage DB solution with stage one comprising of in-depth education and guidance and stage two being digital abridged advice. Stage three, then, would be an adviser-led full advice service for those clients who are deemed suitable for a full DB transfer evaluation.
Algorithmic abridged advice could reduce risk considerably, giving M.I. on every customer that goes through triage with analytics tracking digital journeys. This leaves an audit trail that can be handed to the FCA in any inspection.
So it keeps advice businesses clean, allows the client suddenly to pay far less for a “no” and there is a consistent method of auditing the process and outcomes. In other words, it’s better for the client, better for advice businesses and safe from a regulatory point of view.
Ask an adviser what boxes they would want ticked to convince them to re-enter the DB transfers market and it would be those three. That’s why I believe this rollercoaster is about to start another big climb.