Five providers – Aegon, Friends Life, Legal & General, Prudential and Scottish Life – have come together with Sesame Bankhall and Deloitte to establish some approaches towards consultancy charging in a report entitled ’A shared approach to adviser and consultancy charging’.
Among other things, the paper outlined various charging shapes including the options for consultancy charges to be expressed as a fixed amount or a percentage of contributions between one and 24 months or taken as a fixed amount of percentage of fund value. It also considered how refunds of consultancy charges to clients where a cancellation occurs might operate, and issues surrounding VAT thresholds.
But the report has come in for some criticism for not giving enough detail on the level of charges and for not addressing issues such as decency levels.
Those involved counter this argument by pointing out that they had to be very careful about competition law. That is one reason the ABI did not feel able to facilitate the process alone, and a Deloitte competition lawyer had to be present for most of the discussions. A group of providers sitting around a table deciding how much intermediaries could take from products would not have been acceptable to the Competition Commission.
Deloitte RDR lead partner Andrew Power says: “The FSA said ’you cannot come up with something that is competitively restrictive’. Also the providers did not want to say ’here is the answer’. There had to be some flexibility. How each company actually handles it, depends on what are their legacy systems, what exact policies they are writing and in a forum like this, they couldn’t share that information, because of concerns about collusion.”
Aegon head of regulatory strategy Steven Cameron says the report is worthwhile at least partly because it may help avoid the following scenario.
He suggests that providers could have remained silent and let advisers come up with the charging models. But what if an adviser agreed a shape for consultancy charges with an employer, decided on a product provider, only for them to then say ’sorry, we don’t offer that shape’, he argues. That could see the adviser having to renegotiate the consultancy charge, something they would surely do reluctantly, or switch to a provider that could cope with the shape, and that, arguably, would be a form of provider bias thus undermining the RDR.
Another concern for Cameron, highlighted in the paper, was about ad hoc work, for example, to cope with a change in legislation and how that could be charged, given that in a GPP, all members would have to agree. In the past to cope with this, schemes might have been switched to another provider in order to pay the adviser for the work. Indeed Aegon raised concerns about this switching with the FSA at the start of the RDR project.
He adds: “What isn’t covered explicitly is whether you can do that without individual members’ consent. We think legally that is difficult unless you get permission in advance. We have to see how the market evolves, but it would be unfortunate, if we couldn’t.”
More generally, Cameron is happy to have provoked a debate and even some negative reactions, suggesting that it is much better for providers to hear adviser views, for example about an overlooked, conceivably popular style of charging, while at the opposite end of the spectrum some advisers might realise they are in a small minority with their intended charging strategy.
Most providers say they will come out with more details of their offering between the first and second quarters of this year. They are certainly not seeing huge demand yet, though it is beginning to stir. Aviva group pensions marketing manager Steve Jackson says: “We don’t have a large number of requests for consultancy charging, but we have a steady trickle coming in. I think one of the key things is that providers give as much flexibility as they can.”
He thinks that the popular sort of shape may only begin to emerge in 2013.
Corporate advisers tend to agree. Jelf head of benefits strategy Steve Herbert says: “This is such a big sea-change from factored commission that it actually opens up many, previously redundant, remuneration options for the market to consider. Virtually all intermediaries are looking for the silver bullet that ensures income is maintained, but without disadvantaging or alienating group clients and employees. Much depends on the client size and industry sectors, so it’s unlikely that any one solution will become the norm for some years to come.”
I don’t think the FSA has got its head around it. They are going to stagger around not sure what their own rules mean
Standard Life head of workplace strategy Jamie Jenkins adds: “I am seeing no consensus. I am not seeing every adviser suggesting a particular model and that coming through as a clear winner. Different advisers have different views. If you are trying to build long term value, some kind of fund based remuneration fits that.
“If you operate on an upfront commission level then it might be difficult. You would want to build in a mix of upfront remuneration and some sort of fund-based or trail remuneration.”
Most agree that most pressure will be on those that have relied on upfront commissions to help pay for set up costs for schemes and there are some differences of opinion about how well they will cope.
Citrus4Benefits has a low cost, technology based fee offering but director Tim Gillingham believes much of the market is taking advantage of commission while it lasts.
He says: “What a lot of advisers are doing is getting their existing book in a decent shape, so they are earning enough money to cover their costs with less upfront and more recurring income. I think many advisers who are active in the market are saying ’you will have to review your pension scheme because of auto-enrolment. It is an old Ford Escort but you can make it a Ford Focus. There is a lot of activity for updating schemes and people are doing it on commission to avoid future fees. Some employers are aware of it, from a tactical point of view. There is still a market for commission and different employers like having a choice. Today they have a choice, next year they won’t.”
Others see many hazards in such an approach. Syndaxi Chartered Financial Planners managing director Robert Reid says many advisers are seeking providers’ agreement that they will continue to pay trail commission on plans set up pre RDR past 2013. But he sees all manner of risks suggesting that the big commission paying providers are relying on some of those advisers exiting the market, and will then service these plans direct. The market could even see the resuscitation of direct sales forces or a dramatic FSA intervention.
“The FSA are watching everything really carefully. I could see them shocking everyone as they have done on trail commission,” he says.
Overall, however, opinion is divided on whether we will see the advice equivalent of the squeezed middle.
For example, Power suggests that EBCs are well placed to cope because they already operate in a fee-charging environment. Small advisers to small employers will cope as well, because the arrangements will be very close to adviser charging, but he thinks the middle market has challenges.
He says: “It is a marketing challenge from an adviser’s point of view. Can you justify what you are likely to charge? What type of employee engagement and workplace type marketing are you going to have, because in order to justify the adviser’s value added, they will have to be doing more with the employee, while in the mid-market they may not have been doing much with the employee, apart from a mass mailer. That may not justify their consultancy charging.”
He believes there will be price pressure on this part of the market and it could settle between what is charged in fees to big employers and the higher amounts currently paid under the commission system. However the downward pressure could feed through to fund management or life office admin charges and not necessarily depress the consultancy charge element.
Jenkins thinks that there could be more competition. “I do see the lines between an IFA and a corporate benefit consultant being less clear. Rather than it being commission for IFAs and fees for CBCs we’ll see some commonality in the middle. You might see IFAs vying for the same business in some cases.”
One of the key things about the RDR is to remove the provider influence over remuneration, so even putting a decency level on it is in some way interfering with that
But there remain two other issues. First, what level will decency levels be set? The Deloitte paper was silent on this and providers are reluctant to put a number on it.
Jackson says: “I haven’t got specific levels but we will monitor the types of structures that emerge. When you see something very high in the first year, you need to start to question things. However, you also need to understand why. Because we underwrite each of our schemes individually, we will get to know the types of models being deployed.”
Jenkins says: “I know you would love to hear me put a number on it. But one of the key things about the RDR is to remove the provider influence over remuneration so even putting a decency level on it, is in some way interfering with that. It should be one for the adviser, justifying what they are doing, not the provider putting a maximum on that.”
He says experience from the Sipp business, which operates on something like a consultancy charging model, shows how the market can restrain things. “We saw some advisers taking what we though was an excessive contribution and it played out that way because the employees objected to it and it was changed.”
However there is another sensitive remuneration issue. Just where is the balance to be struck between what the employer pays and what the individual employees shoulder?
Cameron says: “There is a significant journey to go on before we get robust CC shapes. The adviser will be looking at total costs, but because you don’t know how many are joining and spreading that between the members, if charges are very high that could put people off from joining. Employers might be happy with high CC member level, to stop people joining.”
He says no one wants to see that.
Friends Life head of marketing, corporate benefits Martin Palmer adds: “I think that is a debate that still needs to be had. If employers are trying to pass too much of the cost across, then the employees will say why don’t you just put us in Nest.”
Cameron adds that one model his firm sees would have employers paying scheme level overheads and members paying for the amount it costs for them to join. This wouldn’t see members who join on day one shouldering scheme set up costs. However, as with all these shapes it is yet to be tested by the market.
Jenkins says it is difficult to see how a significant fixed monetary amount could work, given the variation of contributions between members. “A hundred pound from one person’s policy is a lot more than from another.”
Thomsons Online Benefits chief executive Michael Whitfield sees a lot of uncertainly among his peers about charging models particularly taking a fee from either employee and employer contributions.
He says: “I think the majority don’t feel comfortable taking a fee out because they are not used to taking a fee out, and they ask what do you do with an older, lower paid person coming up to retirement. Do they take a fee from them? Well the answer may be they don’t join the pension scheme. Maybe they take an Isa out.
“I think there should be an initial fee charged to the member, out of the initial contributions, for whatever service say for gold, silver bronze, £300, £500, £700. It may involve meeting the employee at the top level or just the set up costs at the bottom. Give the employer the choice. Where do I sit on the ’it’s not fair’ argument? I think that is rubbish. Service doesn’t differ whether I am setting up someone on £20,000 or £100,000 salary. You get exactly the same service and I will charge the same amount of money.”
These debates will continue throughout this year and next. But there is also a chance that the market may have a little longer to decide, because the FSA itself is not up to speed.
Compliance consultant Adam Samuel says: “I don’t think the FSA has got its head around it. They are going to stagger around not sure what their own rules mean. They will probably give the industry a year or so, to bed it down, partly because I don’t think they have entirely sorted out the implications of what they have done. It would be nice if the FSA got its rulebook out properly. There is no accurate version of the rulebook – of what the FSA sees the rules being when the RDR kicks in – available on the web. You find yourself picking your way through quarterly consultations. It is relatively difficult to check various practices. The industry is hoping to buy a bit more time and hoping it will be all right in the end, and maybe that will be the case.”
Maybe it will for some. But for advisers currently making the most of the commission on offer in the market, 2013 looks like being a year when developing a coherent consultancy charging model will be a make-orbreak challenge.
