There’s been a lot of hot air blowing around on the subject of ‘contingent charging’ in relation to pension transfers (and especially transfers from final salary pension schemes) lately so I thought it was high time I added some of my own to the storm.
For those not in financial services, contingent charging means we (the advisers) will only charge you a fee if we recommend a particular course of action – usually the recommendation to transfer your pension from where it is now to someplace else.
The FCA has definitely tilted its lance against this form of remuneration – and I can see exactly why. They recognise that such a payment system increases the risk of biased outcomes. lf an adviser gets paid for recommending A (transfer) but not for recommending B (leave it where it is)……well, I think we can all see where some people might be led to in that scenario.
So the answer’s obvious then. Ban all contingent charging.
Well, that’s the route some people are advocating but here at Park we are an altogether more thoughtful bunch so here’s why we don’t think that’s such a neatly parcelled up little answer as some think.
For once, financial services people, let’s stop thinking about ourselves. Let’s take a step back and think about the other side of our transactions – the customers.
One thing about our customers is that they are (l think I can say ‘universally’) human beings and that means they can deliver some pretty kooky responses – not all of which are in their own best interests.
To them, contingent charging actually looks fair and reasonable – just as it does to us too……when we’re operating in another environment to our own, that is.
Think about your own typical financial transactions and you’ll see that your economic activities are littered with contingent charging.
Buying a house? Or a car? Or a television from Currys? Contingent charging. Hiring a plasterer? Stand by for some contingent charging. Can you imagine the plasterer who says ‘actually, guv, that wall doesn’t need anything, the existing plaster is fine. That’ll be sixty quid please‘.
Now there’s a tradesman who doesn’t get a good rating on Check-a-trade I bet.
Consumers are so familiar with the concept of paying money and receiving something in return that when they perceive that they have paid something and received nothing……well, they are not best pleased.
‘Ah’, you say, ‘but the customer who has been told not to transfer has received something. He’s had top quality advice’ – and I would wholeheartedly agree with you.
The trouble is, after reading an article in the Sunday Times or watching a TV programme on Channel 4 about pensions, he didn’t come to you for advice. He came because he wanted you to transfer his pension. So from his perspective, you haven’t given him anything of value at all. Yet here you stand with the brass neck to present an invoice.
You see, value is not as straightforward as some would have us believe. It is, as often as not, an abstract concept driven by the recipient’s own personal views. How else can you explain the prices paid for Prada handbags?
So, where does taking the ‘high moral ground’ on contingent charging leave us?
Well, one fairly predictable outcome is that some customers will vote with their feet and move to pastures more, shall we say, ‘accommodative of their desires’.
Now you might think ‘Well, that’s no bad thing. Who needs clients that cannot appreciate the value of impartial advice anyway?’
As individual advisers, we do enjoy the luxury of being able to adopt that view. The FCA however, should be thinking bigger picture.
What will happen to these individuals? Does anyone suppose that they will simply say ‘Oh well, if I can’t get advice on my transfer without committing to a fee – whatever the outcome – I guess I’ll just hang onto this final salary pension then’
Of course not.
They are bedazzled by sums of money which, in many cases, they will never have seen the like of. It is tantalisingly close. They can almost smell the leather on the new sports car. Give up? Not a chance.
They will scour the internet until they find someone, anyone who will deliver what they want. If they are lucky, that will be an FCA authorised firm. However, if the FCA does take the step of outlawing contingent payments, then the field will be emptied of such firms. It will only be the unauthorised who will be left standing – and then it’s ‘au revoir retirement fund’.
It’s easy to say ‘contingent charging is an evil that risks adviser bias’ and maybe it is – but before scrapping it entirely some thought ought to be given to the law of unintended consequence.
Maybe instead of an outright ban we should consider that
- it’s down to us as responsible, ethical advisers to override that bias and always ensure that, where a conflict of interest arises, it is that of our client which always prevails.
- it’s down to the regulators to identify firms where that doesn’t happen and mete out appropriately firm punishment.
- and, perhaps most importantly of all, it’s down to everyone whose living touches this business – advisers, regulators, journalists, legislators and educators – to hammer home the message that what you should we willing to pay for is advice, rather than a product.
