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A decent proposal for fee limits could ward off indecent outcomes

by Alistair Cunningham on Jan 10, 2013 at 14:44

A decent proposal for fee limits could ward off indecent outcomes

I have strong but mixed feelings about the so-called decency limits, a cap to the level of fees providers will pay advisers, particularly with respect to pensions.

We had a client with two pension pots. 90% of the money purchase value of his funds had a guaranteed annuity rate. Despite being diagnosed with prostate cancer, we were unable to beat this rate with an enhanced annuity. On the remaining 10%, he took an enhanced rate.

Our fees for the advice were 1.25% of the total fund value, but well over the 10% of the money purchase fund. The provider was unwilling to facilitate our fees and the client had to pay a top-up, thus reducing his tax-free sum. In this case, decency limits acted to the client’s detriment.

Of course there is sharp practice: I have seen pension switches at 7% for negligible client benefit, and the banks have been rife with commission-paying products approaching double digit levels.

The cynic in me thinks some firms may still be selecting providers based on the relative generosity in their facilitation, and conversely avoid those with stricter rules.

Defining the minimum

Annuity providers have also introduced minimum fee payments, which brings us to a second dilemma: in facilitating adviser charges, should I expect the provider to pay my minimum fee as opposed to a generic acceptable minimum?

It is quite reasonable that as a business, we set our minimums such that in some cases it is not likely to be financially viable to provide advice for a client and they need to go without advice or seek advice elsewhere.

My preferred approach would be providers applying decency limits at a reasonable level.  However, I would not be in the least bit surprised if these limits just happened to be at the same level as commission the providers were historically paying. 

Given sufficient justification, the providers would be able to disregard these limits. That may be more difficult to police, and care must be taken to avoid unintended consequences such as unauthorised payment charges from using pension funds to cover non-pension related financial intermediation.

Alistair Cunningham is financial planning director at Wingate Financial Planning.

6 comments so far. Why not have your say?

Peter Hurley

Jan 10, 2013 at 16:53

Its interesting to see how others work. Last year; If it had been our client, and based on your description, having identified that we could only work with the smaller fund and charged 1.5% of that. The client would have been advised to go to his cedings schemes and arrange the annuity direct.

Post RDR we would have agreed a flat fee for the fact finding and initial research based on the complexity of his circumstances and a % for sorting out the annuity. The flat fee may or may not have included an amount for helping with the GAR annuities.

I suppose that the underlying issue, and it exists with both our propositions is that working on a % of funds basis is not ideal. We have tried to manage this in part by breaking down which parts of the service are costed and putting in place a tiered arrangement so that larger funds/investments arecharged at a lower rate.

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Jan 10, 2013 at 19:04

Having recently resigned from a bank after 18 years I can honestly say I never saw any commission on any single premium product that wax above 5% let alone 'approaching double digits'. During most of that time the wider IFA community was far more likely to sell high commission products, With Profits bonds paying 7.5% anybody?

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Gillian Cardy

Jan 11, 2013 at 07:19

The FSA did originally ask whether decency limits should be implemented with the adviser charging rules ... and I recommended that they did not impose decency limits because it was very possible that a client would agree to pay a free for a larger piece of work facilitated from a smaller fund - the larger total fee would then seem disproportionate to the value of the facilitating fund but if the client wanted to use, say, their small ISA portfolio to facilitate a fee that covered a wider range of investment, pension, estate planning and other advice that was their choice. Pension providers may want to make enquiries to make sure they are not facilitating unauthorised payments but in principle it is not up to them to decide what the client should do, given that they have received an authorisation for the payment from the client (in accordance with COB rules)

This whole RDR thing is, after all, about giving clients the choice about how much they pay for advice and how they pay for advice. Providers need to learn that it's not up to them to dictate the rules any more!!

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Alistair Cunningham

Jan 11, 2013 at 16:21

Gill - do you not think some client protection is logical in the face of the unscrupulous. How many clients have been fleeced by a 'don't worry about my charges I get paid by the provider' mentality - this can still continue?

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Gillian Cardy

Jan 11, 2013 at 17:56

There is an overall requirement that the adviser charge must be fair value and reasonable in the light of the advice being given ... so there is a clear expectation that advisers will exercise professional concern for client best interests and if the costs of advice exceed the potential value of that advice then the adviser should, obviously, decline to act.

So assuming this is not what you are discussing, we have a situation where your fee is reasonable and appropriate and meets all the requirements of having been agreed with the client and the client has authorised its payment ... but, in the eyes of the product provider, it is "excessive" when considered in isolation in the light of the small non-guaranteed annuity fund.

I got the feeling from your piece that you did not appreciate the challenge to your fee structure - and if the adviser charge has been agreed between the client and the adviser then it is not intellectually coherent to say that in spite of all that, product providers can still say how much THEY think is acceptable.

Who are they to challenge how much work you did, at what rate, and across how much of the client's financial affairs?? For example, do they argue that as it was "only" an annuity purchase it didn't need to have been done by a Chartered Financial Planner so they decide a lower rate for a less qualified adviser who could easily have done this "simple" piece of work??

I can't see that option being acceptable!!

So then you move on to the situation where an adviser has charged a high fee, the client has agreed the amount and authorised the payment, and still not argued about the amount, but the fee is high / excessive. Do we still want the product provider to police the immorality of an adviser who may be in breach of COBS and PRIN?? I think you will find that there is an obligation on the product provider to report the payments they have made - but I would suggest it is up to the regulator to police the overall advice and the charges, not the product provider.

Perhaps the answer is not dictating what level of your fee is reasonable, but is refusing to facilitate any sort of fee whatsoever ... because the "don't worry bout costs as I get paid by the provider" is actually an ethical issue that goes way beyond how big your fee is in relation to an isolated transaction. But then we know that this won't serve clients' best interests either, as you observed.

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david mann

Jan 13, 2013 at 09:13

It seems RDR has not helped some advisers cut the umbilical cord of fee/commission facilitation from product providers. The answer is simple and has operated in other professional services sectors for centuries.

Charge a fee which does not rely upon a 3rd party product manufacturer to be your paymaster.

A nil commission annuity will pay out more in income over the life expectancy than the commission (sorry, "fee") paid.

Time to get in the real world and charge real fees for real added value work.

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