Advice freeze

Intermediaries have their work cut out to think of new ways of delivering advice in the workplace post-RDR, says Stephanie Spicer

It has not always been easy to ensure employees get the financial advice and education they need around their employee benefits. Post the retail distribution review (RDR) it looks set to get a whole lot harder.

“In terms of what it means for employers and employees, RDR is quite bad news,” says Steve Herbert, head of benefits strategy at Jelf Employee Benefits. “Most employers are at last waking up to the idea that pension reform is just over the horizon and that means most need to be changing their scheme to reflect changes such as Nest and auto-enrolment.

At a time when the UK economy is essentially on its knees, compulsory pension contributions and moving the cost onto employers for advice purposes is really not good.”

Beyond basic advice models, there is little optimism. The most obvious model is one which is fee based, but with employers looking to cut costs where they can the last thing they want to do is move from a commission to a fee model.

Herbert highlights the consultancy charging model which is where charges are directly paid from the employees’ own pot on a pound for pound basis.

“At a time when the UK economy is essentially on its knees, compulsory pension contributions and moving the cost onto employers for advice purposes is really not good”

“This has been around for a few years now and is what the RDR says should be happening and I fear is what will become the default option,” he says. “Although it is very direct and transparent it also means day one, month one the employee is worse off than under the factoring rule. This is driving the market exactly to that point where we have charges coming out upfront so for someone who stays in a job for three or four years they will be worse off than they were before.”

Longer term models could see an amount coming off the employee either as fund based commission or straight off the top line over a number of years.

“The latter is more palatable but for our industry that is a huge jump from suddenly income in year one to income over 5 to 10 years. And already the adviser industry has increased costs under RDR,” says Herbert. Much will hinge on whatever solutions the industry working party on consultancy charging can come up with.

Joel Adams, chief exectutive of Lift-Financial, agrees workplace advice will become even less common than it is now: “Many corporate advisers will simply rely on category six promotions and basic advice models to avoid the higher standards the industry is pushing for,” he says.

He acknowledges that there are some sectors for which advice is either not suitable or not logistically possible although he adds that the advent of corporate wraps perhaps implies otherwise. Basic advice models could run alongside these.

“Money and planning for retirement is becoming an ever more difficult subject. If corporate advisers are going to add additional savings options to their platforms then it follows that advice will become an even more valuable commodity to sit alongside the exciting products we will hopefully have at our disposal in the future,” says Adams.

“If staff don’t value what they have got then the employer is not getting the best reward for the cost of that. Firms need to think about that”

Bluefin runs its Orbit Benefits Technology, which allows employees to view their employee benefits online and Julie Lord, certified planner at the firm, says in the future it may be that these types of system will also allow employees to invest into Isa wrappers and Oeics or ETFs or buy extra protection.

“Where the employee needs information only, and the employer is not prepared to pay for a comprehensive service, these systems should be able to provide simple flowcharts and calculators that can help them to make financial decisions. To reduce the risk of them making investment mistakes many systems might offer targeted return funds or life styling options,” she says.

Another route to employees which could become more common would be a tie up with other providers or professionals.

Tom McPhail, head of pensions research at Hargreaves Lansdown, says: “I think you are going to see advisory businesses develop that just specialise in delivering the workplace advice – so they may never sell a scheme.

“Historically employee benefit consultancies have not been very good at doing member communications, so you may get EB consultancies setting up and administering the scheme at a corporate level and sub contracting the advice element to an IFA. The IFA would go into the workplace to talk to the staff and if the employees want advice they can buy it from the IFA.”

The basic advice models therefore could become more widespread and be sufficient for most employees. As Lord says, many employees do not have complex financial affairs and just need a basic level of advice.

“However I am concerned that some people will just focus on the low costs, and they may be making important financial decisions on one financial issue in isolation, without realising the potentially devastating effect it can have on other areas of their life,” she says.

While advisers will have to accept that for many a basic, generic presentation might be the best piece of advice business they get from the workplace still it is beholden on the adviser to continue to offer more and be innovative in their propositions.

For this to work and for advisers to carve a niche and differentiate themselves in what they can offer to employer’s staff Lord says technology is the key and possibly also some behavioural knowledge.

“Simple online systems with calculators and pre-populated documents will ensure that employees get the information they need, at a low cost to both them and the employer.

Employers have to be made aware that there is a direct correlation between happy staff who have few financial concerns and profits. Particularly paternal companies like John Lewis and Apple look after their people because it makes a difference to the bottom line.
Advisers who can help in both these areas will be regarded very highly by employers and employees alike,” she says.

“In the past corporate advisers have tended to concentrate on getting new money into pension schemes and maximising other employee benefits.  In the future those advisers who can also provide good quality “at retirement” advice and services to employees, taking into account their personal goals will provide a great deal of value.”

Mike Godfrey, previously founder and chief executive of FS3 says there is an opportunity coming down the track for adviser firms to focus on the educational side and market that as a value added service to employers for their staff.

“If staff don’t value what they have got then the employer is not getting the best reward for the cost of that. Firms need to think about that. If they have an employee not investing in the right vehicle they have an unhappy member of staff five years down the line when they realise they could have had some education about asset allocation, the options on taking benefits and what they would mean in the lead up to retirement, etc. Without all of that going, on the employees are not going to get the best out of what the employer is providing.”

It is perhaps significant that while there concerns about the lack of advisers in the market as many fall at the RDR hurdle, Godfrey is starting up a new business.

“Although the Government is trying to simplify things it is still a complex world we live in and people need to engage with good quality advisers. It is all about positioning your business, doing it in a professional manner, being ethical in what you are doing and getting a clearly defined proposition. You will get recommendation and referral if you do that. The opportunity 2013 and beyond for good quality advisers whether in the corporate space or the private client world will be extremely good.”