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While intermediaries operating through the workplace may think this review has nothing to do with them, the FSA has made clear that commission issues in the group market will come under just as much scrutiny as those in the individual market. With the time limit for submissions now closed, corporate advisers have been forced to do some serious soul searching and ask themselves some very basic – but crucial – questions regarding how they are paid and what they are paid for when advising on group personal pensions.
Who is the client?
This might seem like an obvious question but it is of fundamental importance – particularly where advisers are trying to justify exactly what they are being paid for.
The adviser will typically view the employer as the client in a GPP. It directs the plan design, usually pays the majority of the contributions and meets any consultant fees. There is usually minimal contact between the adviser and the individual members, beyond an initial set up meeting and annual updates sent via post.
But where there is face-to-face contact and individual advice rather than information packs and telephone helplines the relationship changes. Jarrod Parker, technical and product development manager at Alexander Forbes says his firm sees the employer as the client initially, but as soon as the firm starts to forge relationships with the employees, they become the client.
As Bob Perkins, technical manager at Origen, puts it: “The client can be the employee or the employee or both. The important thing is that the adviser must avoid conflicts of interest and be clear in dealing with all parties whatever their role is.”
Paying for advice
The different remuneration models in the workplace financial services sectors all set different challenges to the lawmakers setting the new RDR agenda.
With fee-based advisers it is obvious that the employer foots the bill. As well as advising the employer on the structure of the scheme and helping with the ongoing servicing, the employer can pay the adviser to offer individual service to employees. It is worth remembering that the law allows the employer to pay advisers up to 150 per member per year to supply financial advice to employees without it being regarded as a benefit-in-kind that is taxable on the employee. Charges for advice on setting up a workplace arrangement will not create a benefit-in-kind charge, however, if they relate to the group scheme as a whole and not to the individual.
If the adviser is commission-based then typically the employee and employer both pay through the charges levied on the fund. While stakeholder charges up to 1 per cent of the fund each year, charges under group arrangements have been driven down in recent years and for nil commission schemes annual management charges of around 0.6 per cent are fairly common.
It follows that the decision whether advice is paid for by fees or commission – or a mixture of both – depends largely on the attitude of the employer, and what they are seeking from the adviser and the scheme. “Those who are more paternalistic might be inclined to agree a fee at the outset and for ongoing services, where appropriate,” says Perkins.
But where the employer is unwilling to meet the cost of advice, commission comes into play and employees must bear the cost. This will come out of the pensions contract – either from their premiums or from the fund – or both.
Commission in the group market is generally structured on an indemnity basis. Despite pressure from Personal Accounts and a desire to move towards level remuneration, anecdotal evidence abounds of insurers still paying high terms in an increasingly desperate bid to attract business in a fiercely competitive market. Indemnity commission is generally based on a percentage of the first year’s premium, typically between 15 per cent and 30 per cent, with a 27 to 48 month clawback period. Commission is also paid on top ups but very few schemes factor in trail commission.
Most advisers do however take renewal commission – typically between 1 and 2.5 per cent of the members’ annual premium.
Some commentators believe the post-RDR advice landscape, which could be upon us as early as mid-2009, will have no place for high indemnity commission.
The FSA appears to take the view of most consumer lobbyists that it is the root of all evil – driving commission bias and prompting advisers to take little ongoing interest in the welfare of the scheme. At the very least, advisers must be able to reel off at the drop of a hat what they are doing to justify the upfront costs.
In fairness, indemnity commission is a way of matching the shape of the charge to the time spent – setting up schemes has always been where the bulk of the work takes place.
According to Danny Cox, head of financial practitioners at Hargreaves Lansdown, indemnity commission can cover advice to the employer, including the winding up of previous schemes, bulk transfers, decisions around what type of scheme they should go for, how default funds may work and other benefits. It can also cover the initial presentation and the communication of the scheme, assistance with establishing an employee website and employee presentations.
As Parker argues, it is often the only feasible way the adviser has of recouping the substantial costs of establishing a scheme.
Cox says the alternative is making a loss in the first year and recouping the costs gradually “Many advisers don’t have the cash flow to make this change, but if they don’t provide the right service employers can vote with their feet.”
The idea of changing remuneration structure is all very well, but it is not always down to the adviser. Perkins reiterates: “A lot rests upon the employer’s willingness to meet the cost of advice and services associated with the arrangement”.
Much also rests on the providers, says Cox. While they continue to pay indemnity commission, advisers will find it difficult to wean themselves off it.
But Neil Aston, senior business development manager at Standard Life, says the absolute transparency of the disclosure regime under RDR will make it very difficult for providers to continue to pay disproportionate levels of up-front commission through mono-charged arrangements – and for advisers to take it. He argues this will affect advisers throughout the run-up to Personal Accounts in 2012. As with stakeholder, firms will have to drop their charges to compete with the 0.3 to 0.5 per cent proposed by PADA. He says: “The combination of complete clarity of disclosure coupled with downward pressure on charges means providers will not be able to afford to pay upfront commission with mono-charged contracts, and advisers will not be able to be seen to take it.”
Having said all this, some commentators, such as Bob Perkins, argue that Personal Accounts’ reach into the corporate market may be limited.
“At the moment, athough there are some FSA regulations that apply, advice to employers is a non-regulated activity, so if employees are not receiving advice then no regulated advice is being provided. However, that may change if the RDR principles are applied at member level in future. This could include Customer Agreed Remuneration (CAR). We shall have to wait and see to what extent that applies.”
For an increasing number of commentators CAR – or factory gate pricing – would appear to be a solution. The FSA has certainly made positive noises about it.
Aston believes advisers will have to become more flexible in their approach to remuneration. To attract larger corporate clients, he argues they will have to warrant the tag ‘Professional Adviser’ under RDR – as distinct from General Advisers who will take commission only. So they might well take fees for larger clients and have the option of CAR when appropriate.
Recent research from the Corporate Adviser DC Summit would appear to back this up, with only 12 per cent of adviser firms stating that they would expect to run principally on a general adviser commission basis only. Cox, for one, believes CAR will prove to be the “final nail in the coffin” for indemnity commission.
Another criticism corporate advisers will have to address is that they earn renewal commission – based on a percentage of premium – or fund-based trail commission for what is in many cases sitting on their hands. Again, the FSA will demand that advisers catalogue for GPP members exactly what they are doing for their money. It will not be enough for advisers to just protest that clients don’t see all the work that goes on behind the scenes.
Aston believes the FSA will crack down on fund-based or trail fees in the corporate market. “In the wealth management world we would tend to associate fund based or trail fees with ongoing investment advice. With 90 per cent or more of contract-based scheme members going into a default fund and staying there it’s hard to make the same assumptions in the group pensions market. RDR may make this anomaly harder to sustain.”
Having said this, he says trail commission which genuinely encompasses ongoing care for the client has got to be healthier than a one-off transactional payment. But to justify it, advisers will not be able to dump clients in default funds and leave them there.
Steven Cameron, head of business regulation, Aegon says that, anecdotally, under 1 per cent of schemes are set up with trail commission anyway.
But he does agree that there needs to be more clarity over what the employee is paying for – even if it is just providing support for the employer.
No one really knows yet exactly what the post RDR landscape will look like and how corporate advisers will be affected. What is clear is that the days of high indemnity commission and lack of transparency over services provided in GPPs are almost numbered.
Adrian Boulding, “Improve the process of annualisation” When worst advice pays commissionWhen it comes to advisers getting money for nothing, one obvious area of concern for the regulator could be annuities. Advisers have frequently been criticised for the fact that they get commission – albeit around 1.25 per cent of the pensions pot – for giving advice on annuities even when they don’t give any. The vast majority of people don’t use the open market option and just roll over into their existing pension provider’s annuity. Savers who haven’t had contact with their adviser for years will still end up paying that adviser commission for the privilege of rolling over into a sub-standard annuity with many providers if the agency between adviser and provider remains live. While this is unlikely to sit well with most people’s common sense notion of fairness, it won’t sit well with the FSA and the Government either. They are more anxious than ever for people to shop around and will be breathing down providers’ and advisers’ necks to make sure this option is promoted. From a business point of view, says Adrian Boulding, wealth policy director at L&G, advisers may feel they don’t get a fair return for the effort they put in with small pots, making them reluctant to help members exercise the open market option. But while the commission paid on small funds will be around 100, this is not likely to be seen as an excuse by the regulator. Boulding says the answer is not to increase commission, as that would reduce the gain to be had from shopping around. Instead, make the process slicker, so the adviser can deliver the goods to his client in a shorter time. L&G, the Pru and Aegon are all piloting a data transfer initiative designed to improve annuitisation. The key questions the Retail Distribution Review is asking the industry about remuneration
Expert view
Wealth policy director, L&G
Key questions