The subject of defined benefit (DB) transfers is never far from the headlines, and generally not in a positive way. For trustees, the concern is, quite rightly, how to protect their members.
It’s a fact that some of the practices in the industry have not been good enough. Members of DB schemes are also vulnerable to scammers, a subject of much regulatory activity of late. There are times, however, where a transfer may be in a member’s best interests but finding a safe haven in terms of advice is increasingly difficult.
The FCA has quite rightly raised the bar in terms of best practice. This, allied to a rapidly hardening PI market means that high street advice in this area has all but disappeared.
Perhaps not a bad thing as this type of advice is specialist and complex. You simply can’t meet the FCA requirements doing this work occasionally.
The other issue the FCA recently addressed was the “no win no fee” advice model that some advisers were using. In the jargon, contingent charging. In simple terms, “I’ll advise you, but only charge if I make a recommendation to transfer”. What could possibly go wrong with that?!
Whilst this is absolutely the right thing to do, it doesn’t help members in terms of accessing affordable advice. Advisers will often charge a percentage of the transfer value, sometimes as much as 3%. That fee is due regardless of the advice outcome. For most members, that’s a complete non-starter.
Tailor made model
The topic of appointing an adviser definitely polarises opinion. Some trustees think this puts them on the hook if things go wrong. Others think that they’ll be on the hook if they don’t facilitate the right standard of advice.
For our purposes, we’ll assume a scheme decides to appoint an adviser. Where to find a good one? Not on the high street that’s for sure. There are, however, specialist firms which operate a tailor-made model, which is as far away from the generalist model as you can get.
- Firstly, it’s fixed fee advice payable regardless of the outcome. Depending on a number of factors it can be in the range of £1,500 to £1,000 per person.
- Next, the firms in question adhere to an industry code of good practice. Without getting into the detail, it’s rigorous.
- Finally, these firms are under substantial FCA scrutiny, not due to any concerns over their advice quality, but because they deliver the majority of advice in this area. The FCA hasn’t been trying to kill the transfer market. They want to ensure that advice is delivered by the right firms operating to the right standards. That’s the specialist firms.
This type of tailor-made model charges a set-up cost of circa £10,000 to train their advisers for a specific scheme and set up all the necessary processes. This is what allows them to deliver fully FCA compliant advice on a fixed fee basis.
Bridging the gap
Now here’s the interesting development. In killing contingent advice, the FCA realised they were restricting customer access to the advice market. So, to make for a less expensive entry point, the FCA has created something called Abridged Advice. It's still fully regulated, no corners cut, except it can only have one of two outcomes.
- Stay in the scheme.
- Move to the next stage of advice.
Most specialist are offering this “stage 1” advice at a significant discount to full advice. Given that many members will be best placed staying in the scheme, it’s a much cheaper model.
That’s where there is another significant win. Under stage 1, the transfer value is irrelevant, to the extent that no analysis of it is allowed. It’s all about the individual, their situation, goals and ability to take transfer risk and other factors. That means an accurate, illustrative transfer value is fine. Many administration platforms can now generate these, and it avoids creating guaranteed transfer values for anyone other than those moving to Stage 2 advice. If a scheme is running an exercise, this can prove to be a significant cost saving.
If a member moves to stage 2, it’s because they have been judged to have the right characteristics for a transfer. There’s an additional charge at stage 2, but the probability is very high that a recommendation to transfer will be made. Stage 2 is then about evaluating where the transfer value should be invested and all the analysis that the FCA requires, including TVC.
Abridged advice provides a cost-effective way for trustees to help members of DB schemes to a safe haven, in terms of advice and achieve the best outcome for their particular circumstances.