The regulator’s inability to offer a clear distinction between a client’s ‘needs’ and ‘objectives’ has made the troublesome issue of advising on pension transfers even more difficult for IFAs.
Defined benefit (DB) transfers are in high demand and the Financial Conduct Authority (FCA) consultation paper, Advising on Pension Transfers (CP17/16), does not assist in clarifying the process. In my view it actually makes the whole topic even more complex.
Needs and objectives
The first challenge can be distinguishing between a client’s needs and objectives. The FCA explanation of this is: ‘While a client’s objectives may be the reason they have sought advice, the client’s needs should influence the advice process. Firms should challenge the realism of a client’s objectives, where appropriate including any objectives which do not immediately appear to be rational or factually correct.
‘A recommendation is unlikely to be suitable if it meets the client’s objectives but not their needs. The analysis should therefore include sufficient information for advisers to understand and explain how prioritising any of the client’s objectives may result in trade-offs, for example, if the client is prioritising death benefits, then any adverse impact of this on potential income should be illustrated.’
In my view there is very little between the two. ‘Need’ has a bit of the ‘imperative’ and ‘objective’ is probably a bit of a ‘nice to have’.
If a potential transferor indicates they want to access some cash to assist in a business venture and they do not care about the guaranteed income, is this a need or an objective?
The outcome may be clear to the adviser but goes against the initial wishes of the client, potentially leading to insistent client territory.
For example, a client may wish to provide for children after death, even at the expense of their income: an objective rather than a need.
However, the fact-find may establish the client has little other pension savings and a number of spending commitments, such as an outstanding mortgage. A cashflow analysis would then establish they are more reliant on the guaranteed pension income than they first thought. A clear need, which, according to the FCA guidance, trumps the initial objective.
The advice in this case is likely to be not to transfer. The adviser will need to explain why the need they have identified is more important than the client’s objective.
A second challenge can arise in cases where the adviser charges on a time-cost basis. This comprises an initial charge for providing the recommendation and an implementation charge. This is when the advice is to transfer and the adviser processes it for the client.
There is a fundamental mismatch here. The adviser can provide advice to the client who would have to pay, even if the advice is not what they want.
The end of the FCA paper says: ‘The clarity provided by this consultation should better equip advisers to give the right advice. This will help consumers make well informed decisions which consider all relevant factors to allow them to decide whether or not to transfer. It will also give consumers confidence in the advice that is being provided, whether or not this results in a positive recommendation to transfer.’
Will consumers who have paid several thousand pounds to be told they cannot move their own money (which they could if it was in a defined contribution scheme) really feel that confident?
The extra mile
The introduction of the pension freedoms has encouraged many people to view their pension fund in a different way. It has also created even more of an objection to having to buy a guaranteed income.
Many people with DB pensions want that same opportunity but have to pay for advice. This starts from the perspective that a guaranteed income is the solution.
Explaining the implications of a DB transfer to a client is the starting point. Explaining the implications and the client understanding these implications and acting accordingly must be the desired outcome.
Mike Morrison is head of platform technical at AJ Bell