A favoured phrase among politicians, both across the pond and here in Blighty, the old adage ‘if it ain't broke, don't fix it' has become all too good an excuse for total inertia.
There are of course many instances when this is only too true, but I would argue that certainly in the corporate pensions arena this maxim is in danger of being over-used. There are some fundamental areas of pensions reform that I'm sure we all agree are broken and therefore do need fixing. You'll be pleased to hear I am only going to attempt get one of these off my chest and that's the issue of up-front commissions.
In the interests of you reading on, let me just say I know this is a thorny, emotive issue but I think worthy of more debate. It won't come as the biggest surprise to hear the man from Friends Provident say that high upfront commissions are not sustainable. Now there are some providers who are in the same camp and would likely cite the same reasons for saying this- too long payback periods, lack of long-term value for the business- but there are still those who want to compete on commission rather than the strength of their proposition and service quality. Some might say it's because those in the deluded camp know their proposition won't stack up on those factors-ouch!
Quite simply, I believe commissions don't serve the customer's best interests. It means that providers compete on commission rates not on product/service quality and price to the client (in other words the AMC). Too often the question asked is "this is the AMC we want, now how much commission can you give me?" when it should be "this is the adviser remuneration I need which I have agreed with my client which will be the same irrespective of the provider chosen, now what price can you give my client?"
Arguably offering commission can incentivise poor behaviour in the market and mean some advisers simply write new business to generate new commission even where there is no real reason to move the scheme - otherwise known as "churning"- the costs of this churning are ultimately borne by customers via enhanced product pricing.
By the same token I don't actually think high upfront commissions serve adviser interests either. Sure they can generate lots of short-term cash, but they result in a business model which is highly volatile, exposed to economic up and down turns and is dependent on the drive to generate new sales every month, rather than earning ongoing revenue from serving existing clients.
We need a more fundamental solution to this problem and I believe consultancy charging (as proposed by the FSA) could be just the ticket. Not only will this enable advice charges to be "bundled" into the product charge but it will also do it in such a transparent way that does not lead to commission-driven bias in the way I've described. Corporate advisers can then choose to take remuneration over time (e.g. fund-based, as an add-on to AMC) or as premiums are received (with a corresponding deduction from employer or employee contributions).
I see no reason why this cannot work as it does in other contexts. Inevitably some might say the employer and member won't like charges on premiums - but this comes back to explaining the value of the services received. Technically the member is already paying for the adviser's charges, but in a completely non-transparent way which also involves significant cross-subsidies with those members who continue their plan until retirement subsidising those that pay in a few contributions then transfer out - surely that can't be what we want to encourage. For those cases when advisers require upfront remuneration and employers want the charge in the AMC we need a third-party factoring market, not driven by providers, to bridge this gap.
And let's not forget what we are trying to ‘fix' is a financial service to the adviser and this should not be a basis on which providers compete. If we do, then we'll get distracted from the day job of serving the customer with a high-quality, good-value product and service.
Martin Palmer is head of corporate pensions marketing for Friends Provident
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Transferring out of DB scheme
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