Will your advice to someone taking their retirement income this year or next be subject to challenge two decades hence, when the client runs out of money having “unfortunately” lived too long, too well, or both?
That could be the situation without meaningful long-stop reform. The issue is back in the news with Derek Bradley of Panacea having raised the case of a retired IFA being pursued very many years after advice was given and the firm defunct.
Consumer journalists generally say the benefit of the doubt should always be given to the consumer.
If advice today is not covered by a long-stop...then it greatly increases the risk that advisers will deem reaching out to the middle market as too risky.But does a long-stop always benefit consumers? The classic example used by both sides in the debate is that of endowments. When the issue of shortfalls and underperformance came to light, many IFAs were discouraged from getting in touch with former clients by their PI insurers for fears of provoking claims.
Many sold their endowment policies on the second-hand market, leaving them without a repayment vehicle – a strategy guaranteed to maximise the shortfall. There are now large numbers of people, including many approaching retirement, without any means of paying off the capital sum. Better advice would have been to either pay in more or to start another repayment vehicle, but they did not get that advice.
Now this isn’t necessarily entirely due to the absence of a long-stop, but it does suggest the regulatory structure didn’t serve a wider definition of consumer interest. And one has to wonder if the lack of a long-stop encouraged advisers to let sleeping dogs lie.
That, of course, was then. Now we confront a very different advice landscape that has undergone two seismic changes with the RDR and auto-enrolment, and which is about to undergo two more – the pension income reforms and the creation of ‘guidance’.
The issues of redress, compensation and the long-stop are intimately linked with how the financial industry communicates with consumers. If advice today is not covered by a long-stop of some description and duration, then it greatly increases the risk that advisers will deem reaching out to the middle market as too risky.
Although there are many perfectly reputable execution-only players out there, it is likely that some consumers will encounter the Wilder West of ‘introducers’ that stay just the right side of the law.
This is in spite of the fact the RDR has encouraged a more long-term approach from advisers to client relationships, while the government has ushered in a pension revolution with clear risks. Most people would benefit from proper advice. But will many receive it?
In the early 2000s, people were bombarded with marketing encouraging them to trade in their endowments. Advisers mostly stayed clear. In 2014, people may be bombarded with all manner of confusing information about their pension choices. But maybe only the top of the market will get proper advice.
In this scenario, surely the lack of a long-stop starts to look increasingly out of date. If it increases access to decent advice, then surely it is in the broader consumer interest. At the very least, we need a proper debate.
John Lappin blogs about industry issues at www.themoneydebate.co.uk
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