Tom Hegarty: The 'advice allowance' is not all good news
The theory behind an allowance to encourage people to seek financial advice is all very well, says Tom Hegarty, but in practice it raises a number of concerns for advisers
Recommendation 14 of the Financial Advice Market Review, which was published by the Financial Conduct Authority (FCA) back in March, suggested the regulator would explore options to allow consumers to access a small part of their pension pot before the normal minimum pension age, to redeem against the cost of pre-retirement advice.
Adviser charging rules currently already allow customers to pay for advice from their defined contribution pension funds, where the provider facilitates this from their product. Any adviser charge, however, must be specifically in relation to advice relating to the product from which the advice fee is taken.
This new consultation would allow adviser charging to be taken for more holistic retirement planning and all providers would be required to facilitate this within their products.
Speaking on behalf of the New Model Business Academy membership, for whom I have recently hosted a number of best-practice meetings, I would - in theory - welcome this attempt from the Treasury/FCA to make the facilitation of adviser charging a requirement, thereby enabling customers to use their pension fund to pay for advice. I do, however, have concerns around a specific ‘allowance', which could cause more challenges.
Generally, this allowance assumes the customer will take advice on an ad-hoc basis, rather than obtaining a regular financial advice service. This could be termed as ‘transactional' advice, which most advisers I speak to would rather steer clear of, due to the costs and liabilities associated with full regulated financial advice and protection provided by the Financial Services Compensation Scheme - especially on a one-off basis.
Not only would many advisers steer clear of transactional advice, most would also agree £500 is unlikely to be enough to cover the costs of providing advice to an ‘average' client. Retirement advice can vary from being fairly straightforward to extremely complex. Why is an amount of £500 suggested as the allowance, rather than allowing the customer to pay for the advice they receive relative to their individual circumstances?
The reason for the suggested allowance amount to be specifically £500 may be to protect customers being overcharged for advice, because this allowance is likely to attract ‘scammers' to target customers' pension pots. On the flipside, however, this may then result in £500 being the standard fee for an initial advice consultation when, in actual fact, the cost of providing this initial advice is less expensive.
It may incentivise advisers to take an initial fee and then move the client's pot, just so that the new product can help facilitate adviser charging with an ongoing fee and an associated service agreement.
Also, what message will the allowance of £500 give to those who are currently receiving financial advice and paying much more than this? Will they suddenly feel they are being overcharged?
Why A Specific Price?
You may have heard the Warren Buffet quote "Price is what you pay, value is what you get", so why should a specific price be introduced for financial advice? Should advice not be charged at the rate specific to individual clients, obviously abiding by the principles of fairness and decency?
There is also a concern around the costs and complications involved for product providers to build the administration and functionality needed to facilitate this adviser charging, especially where many of the pots involved are held in legacy products.
Many pension funds are held in small pots, such as NEST and new master trusts. The costs to build this new infrastructure - to be borne by product providers - will need to be recouped, possibly through increased charges, which would ultimately be funded by the customer.
This proposed advice allowance is separate from, and not to be confused with, the tax exemption for employer-arranged advice, in which regard the government announced at the budget this would be increased from £150 to £500. Will this create confusion due to the amounts being the same? Will there be some clarity provided on how these allowances can be used in conjunction with one another?
The FCA should recognise advisers' concerns inherent in the introduction of this advice allowance and understand the costs and liabilities associated with providing financial advice. The greatest concern would be introducing an arbitrary figure that would not accommodate the differing requirements of individual customers and the value delivered to each individual customer depending on their specific circumstances.
Tom Hegarty is managing director of the New Model Business Academy, part of the SimplyBiz Group