Guidance guarantee should not be free – Axa IM

Retirees will be more likely to rely on the advice given through the guidance guarantee if they have paid for it rather than received it for free says Axa Investment Managers.

The provider cites research from Professor Francesca Gino of Harvard Business School, whose study of the impact of free advice versus advice that is paid for found individuals are significantly more likely to rely on paid advice during a decision-making process.

The research found people infer quality from price based on the belief that the two factors are positively correlated. The study found paid advice is subject to a ‘sunk cost’ effect, meaning people do not want to waste their investment so will be more like to use the advice that they have paid for.

Professor Gino also found that when advice is acquired at a cost, individuals weigh their personal opinions less, whereas when advice is free, they weigh their personal opinions more. Consumers infer price as a signal of quality, and therefore give free advice less credence, she found. 

The provider says harnessing this increased engagement with paid-for advice can be achieved by paying for the guidance guarantee out of a levy on the member’s fund.

Axa IM retirement markets strategist Stephanie Condra says: ““We support the suggestion that that every individual with defined contribution pension savings should have a right to impartial guidance at retirement. However, given the importance of this service in guiding investors towards better outcomes, the system needs to be designed to incentivise members to use the service.  Research comparing the behavioural outcomes of free versus paid advice lead us to suggest that consideration should be given to funding the service – even partially – through a member levy.  It is likely that it will take more than signposting and quality standards to engage members, but perhaps if members are paying the piper, they will be more likely to take advantage of the guidance that is on offer.”

“If individuals fund the guidance service, this also helps to create an alignment of interests: those that are paying for the guidance are the ones that are benefitting from it most. Likewise, there is no other stakeholder that can attest to the quality and independence of the service, whether it is relevant and up to date, if improvements need to be made, or whether the service introduces additional complexity or confusion.  This feedback loop is strengthened if members are paying for the guidance because it creates accountability between members and the independent guidance provider. This relationship will hold providers to a higher standard and will motivate them to deliver a customer-centric service that meets the evolving needs of their paying customers.

“In practice, a guidance system funded by individual members could be sourced through a levy applied to the value of a member’s defined contribution assets each year.  Total UK market DC assets are valued at approximately £276billion, which would mean that a 1bps levy would generate £27.6million in funding for the development and delivery of the service each year. This is expected to grow over time, providing more funds to support the ongoing evolution of the service and ensure that capacity is met. From an individual member basis this is a relatively low sum, but will still create the financial link between the member and the service.

“To minimize the operational burden, the levy could be calculated and collected by the scheme administrator through a redemption of units. Employers that use the guidance service to replace any advisory support that they were funding before the pension reforms might choose to pay this levy on behalf of their members through a ‘top up’ of units each year.”