Consultancy charging will work, but advisers and providers will have to demonstrate ’better than Nest’ propositions to justify it says Gavin Norwood, insurance partner at Deloitte
While the challenges associated with implementing consultancy charging are significant, there is no reason to doubt that they will work.
However, there is a potential misconception about the FSA’s intentions regarding “sufficient flexibility” of consultancy charging, and there are realistic scenarios where the take up of facilitated consultancy charges might be lower than anticipated.
Consultancy charges will take time to bed in. Even though the new processes will be relatively consistent across the industry, there will be variations in the structures offered and technology solutions used. In introducing consultancy charges, pension providers and other firms facilitating adviser charging need to satisfy the requirement to offer ’sufficient flexibility in the terms of consultancy and/or adviser charges it facilitates’.
Some pension providers have suggested the ’sufficient flexibility’ rule relates to the number of different charging models the provider decides to support. However, we now believe the FSA is not seeking to dictate the type or number of charging models that a pension provider offers advisory firms.
A bigger question is whether the adoption of consultancy charge facilitation mechanisms will be considerably lower than anticipated, leading to adviser firms not being able to profitably advise employers in the currently commissioned part of the market. There are two aspects to this.
With Nest now providing an alternative to the traditional corporate pension providers, will employers justify to themselves and employees additional charges for advice coming through the product, and if so, to what level? Clearly this is as much up to the corporate pension providers to develop compelling propositions at the right cost as it is up to the adviser firms to justify the value of their advice. But if Nest becomes accepted as a default option, any disparity in charges to employees will be very visible, making it more difficult to charge additional fees for advice to employees through the scheme.
We now believe the FSA is not seeking to dictate the type or number of charging models that a pension provider offers advisory firms
Secondly, will adviser firms find sufficient business and be able to charge sufficient fees to remain profitable as income streams from commission die away? This falls squarely with the advisers and much will depend on the degree to which they have moved their business model and prepared for any financial strain ahead of the RDR deadline.
In light of these factors, how will consultancy charges work? A consultancy charge agreement is between the employer and adviser firm. For a provider firm to facilitate charges through its product, the adviser will have to ensure that its terms of business with the providers are amended to include this service. The market is already moving to complete this ahead of the RDR deadline. The advice process will change slightly to incorporate the facilitation of the charges: starting with the initial meeting where the adviser and employer will agree the advice charges and how they will be facilitated.
As the adviser develops an understanding of the needs of the employer, they may then agree an approach to apportioning the charges across the scheme members. The adviser will research the products and consultancy charge options available, requesting terms for the scheme and sample illustrations as usual, but ensuring that these include the impact of charges.
Once the recommendation has been agreed, the adviser and employer will complete a consultancy charge instruction with or as a part of the provider’s new business forms. The instruction will capture initial, ongoing or ad hoc charges at scheme and/or individual level. Fee structures are likely to include initial payment or percentage of contributions (single or regular), and a fixed payment or percentage of funds for ongoing charges.
The provider will validate the instruction (potentially at member level) and set the scheme up. Charges will be communicated to the individual scheme members, their employer and adviser as members enrol. From this point, the provider will administer the charge and credit the adviser firm as agreed in the instruction, with regular remuneration statements to the adviser. Adviser firms’ back offices will therefore have the challenge of incorporating consultancy charge reconciliation alongside current commission reconciliation systems.
The challenges facing advisers are great and success will depend on the degree to which they have changed their business models and prepared ahead of the RDR deadline.