The sun will finally set on commission from workplace pensions in April 2016, but some providers are moving to phase out the payments early, turning off in the coming weeks and months the revenue tap that has funded much of the corporate advice of recent years. So how are firms, particularly at the smaller end, handling this seismic shift in their business model?
Few advisers, or providers for that matter, want to go on the record to detail the full extent of the problem faced by intermediaries. But off the record comments suggest that many adviser firms are behind the curve and may not have planned for the change as well as they might.
Some experts are predicting a degree of balance sheet stress for adviser firms, especially for those who still haven’t broached the issue of fees with clients, or have mentioned it, but haven’t properly communicated what the switch in payment method will mean.
It is also remains unclear whether advisers who fail to convince employers to pay the fee demanded will simply pass responsibility on to the provider concerned or to another adviser with a business model that makes dealing with these clients work. Some advisers working in the corporate market suggest that smaller firms are struggling to get the pricing point for their services right.
Advisers are certainly making local agreements – where a firm takes on AE business but with gentlemen’s agreement that any retail advice work will always be passed back to the sourcing IFA.
Some experts suggest that the market is on the cusp of significant change, but perhaps not quite yet. Hargreaves Lansdown head of pensions research Tom McPhail says: “Over these next few months IFAs will see their income stream drying up”. He says that presents advisers with three choices. “Option one is they go back to their corporate clients and negotiate a fee. Some will do that for some clients. Option two is they walk way if clients won’t agree to a fee and abandon them to the mercies of a Lifeco or perhaps another adviser. With option three, some will look to negotiate a transfer to a third party saying ‘I can’t provide a service in this climate but here is friend of mine who can’. That offers some continuity of service. Some deals might get struck. You feel like it is about to happen.”
Aviva head of pensions and investments policy John Lawson says at provider level, he is seeing no really significant change just yet. He says: “We are seeing no great market change at the moment. Commission is still being paid on existing schemes written before 2013, so this softens the blow for advisers meaning they have a bit more time to replace income stream with fees. This will come to an end in April 2016, so may trigger some switching then as advisers offer to review schemes for a fee.
“Advisers are gradually transitioning towards fees and providing new services such as AE compliance, employee seminars and work site educational material.”
He says that there is also a trend towards employers dealing direct with providers where it may not be commercial for an adviser to deal with an employer or where the employer doesn’t want to pay the adviser a fee.
He adds: “Talk of corporate wrap has dwindled to nothing. There is no interest from employers at all, although flex is still on the agenda, but only when AE staging is complete.”
Master Adviser partner Roy McLoughlin says he is still worried if not exactly panicking about the commission transition, and says employers blame the government for shifting the cost onto them.
“Employers are saying ‘Our staff are getting a cheaper AMC, but we have got to pay you more, so that effectively means the government is charging us more’.”
He adds: “Some employers will say come in and talk to the staff, but come in on a more limited basis. Some are saying we don’t want you in anymore because we just can’t pay the fees. Some are saying charge the individuals, but I don’t think that is going to happen. With adviser charging, there is an assumption that the individual will pay, but no one on £30,000 a year is going to pay £150 for a half hour session, out of their pot. Our relationship with customers is going to break down. That is a real worry.”
McLoughlin says that if employers say they will pay no fees whatsoever, some advisers may take a risk and do surgeries to cross sell, but he adds there is no guarantee that is going to work.
He doesn’t believe a full picture will emerge until next year. “There will not be an answer until the new year. Some people are surprised that we want paying now. Some are saying keep coming in. But it is even a big issue for the EBCs, because the majority of the bigger firms took commission too.”
Thomsons Online Benefits chief executive Michael Whitfield is sceptical about the extent to which his peers are well positioned. Among employers, he says what will emerge is a market of haves and have nots. “We have been flagging it to clients for the best part of two years. The majority of our corporate clients have accepted they have got to pay fees for services. That is absolutely fine. I would say about 75 per cent of our clients have moved to fee basis now. But a lot of advisers are only looking at it now. The writing was on the wall. Many clients have prepared and accepted it, almost with a Gallic shrug. Some smaller clients are worried, because they don’t have the budget allocated. Some are going direct to a provider but even some providers are charging or won’t accept them.”
He says he is surprised about a lack of preparedness among some advisers, while it was inevitable some employers would either fall back on dealing with providers or dealing with it themselves.
However he also says providers themselves are also guilty of ostrich-like behaviour. “The providers at the AMD-end of the market have schemes that are overpriced for a commission free world. It is almost like providers have said let’s not start a war over pricing,” says Whitfield. “They say they offer a good service and don’t need to reduce prices. There is stoic resistance, but people will move on to a commission-free basis first and then move to competitive tender.”
He says this year, things may remain calm, but that next year things will be hectic. “We are finding where the incumbent provider is offering 0.3 per cent or 0.35 per cent AMC, but we are seeing offers of 0.2 per cent AMC. It is going to very competitive next year between providers and advisers retendering schemes”.
Whitfield says that in terms of the top end of the corporate market, he is sure most clients will pay fees, but his view is that among SMEs, the majority won’t.
“People won’t see why they have to pay fees, but once it settles down, it can only lend itself to advice being valued more.”
Jargon Free Benefits CEO Steve Bee says that his business is predicated on providing a different income stream to advisers, based increasingly around their relationships with accountants.
He says: “The advisers we work with have changed their business model. In effect, they are working to the EBC model, the employer as client and they are selling services to the employer. We are paying substantial sums to IFAs from employers – though we don’t know whether that is typical outside our client base.”
“We have seen business from a lot of mid-sized firms though we set things up for what is about to happen next year. For the micro firms, it will essentially be an accountancy-based product. Our new product is only available through accountants, but we ask IFAs to introduce those accountants.”
“If there was ever a time for advisers to work with local professionals it has to be now. Accountants serving firms with say around 10 employees who have maybe 200 businesses will already be running their payroll, RTI, PAYE and VAT. They will shift that into doing AE as well. IFAs can work with accountants with that.”
He says his firm will also provide an online chat facility for employees but that can then throw up other advice queries which will then be fielded out to advisers. He says the product can come with the end price set by the IFA, who may wish to price in coming into an employer three or four times to do surgeries, or it can be sold at a fixed price with a regular introducer fee.
“IFAs find it tougher to work today for money tomorrow. But you are plugged into local businesses is which is not a bad place to be. I think we are building a new type of EBC,” he adds.
Syndaxi Financial Planning director Robert Reid suggests that many advisers need to indulge in a bit of brinkmanship. He recently set up an AE scheme and offered the employer a minimum £1,000 a year for ongoing advice, or an hourly rate, which could work out at one hour a month, costing £1,800. The employer opted for the first fee.
“We note every minute. So the client can see what they are getting for their money. But the bulk of the market is not time recording so they are not going to know exactly what time they are spending or what the cost of delivery is. That means the client is not going to be convinced as to what they are paying for.”
Advisers dealing with lawyers, accountants and advisers
With so many employers likely to change their approach once they are asked to pay a fee, some advisers are looking to make the most of the back book they already hold. Syndaxi Financial Planning director Robert Reid is also taking part in a tender with someone who has around £50,000 of revenue on offer, for which he wants ‘half ongoing’.
“I have said fine but there is claw back over three years. Of all the people that have pitched him, no-one has pointed that out. They have all accepted it, but I have said if they are going to do that without claw backs, they are all idiots. Do you really want idiots getting hold of your clients, and he will continue to advise the directors.”
Some smaller advisers are rising to the challenge, charging fees and striking referral deals with other local advisers. Colchester-based Plan Money offers two AE services – one is comprehensive and the other a scheme selection service with an extra cost for presentations to staff.
Plan Money director Peter Chadborn says: “We’re have partnered with various accountancy firms. We anticipate that if it continues this time next year we may be doing a whole heap of AE work. But at the moment, we have one or two schemes a month going through.”
He says a lot of IFAs don’t want to get involved but realise they have to. “A lot of our business comes from solicitors and accountants. If you link with a large accountancy firm and they are dealing with three IFA firms, your star is diminishing if you can’t deal with AE for them.
“Some IFA firms are doing it as a loss leader, some wish it would go away, others have embraced it fully and others are outsourcing. We have one firm that is outsourcing their AE to us, but we have a gentleman’s agreement that any other work that comes off the back of it, goes back to their firm.
“We thought AE was just going to be such a big thing, because of the element of compulsion, and realised we had to be up to speed with it, because of our existing client base. We then realised that a lot of the market didn’t want to do it or that big workplace advisers were really quite expensive and so we set out our stall to do this work.”
Another smaller adviser, Hampshire-based Nexus IFA founder Kerry Nelson is also embracing AE work. But she says the pricing point is a significant issue.
“The time you spend investing on a scheme can sometimes run into many hours. To bill it on an hourly basis would just be bonkers. You have to have a balance. The pensions have become compulsory and while some employers fully embrace it, there are those who are going to be dragged to it at the last minute. To say “we are going to charge you a huge fee”, they may see as another kick in the teeth. Then again it has to be at a commercial rate. You also have to be geared up for it administratively. If you are going to entertain operating in this market, you have to have well-oiled systems behind the scenes to make it cost effective, given that the fee you are charging has to be palatable.
“To try and charge on an hourly basis is probably not credible. With the big workplace advisers their charges are phenomenal. But for us, offering a service to a firm on the high street or based in a little industrial estate, you have got to charge it so that you are meeting them halfway”.
