PensionsNov 2 2017

How pension freedoms exacerbated the insistent client issue

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How pension freedoms exacerbated the insistent client issue

Michael Douglas’s character in Joel Schumacher’s cult classic film Falling Down evokes a lot of sympathy for the average, downtrodden man.

In one scene, insisting on his rights as a customer, he is so displeased with the sorry-looking burger he is given, instead of the delicious image on the advertising board, he loses the plot violently.

Thankfully most demanding customers in the financial advisory world don’t come to an adviser’s door with a bag of weapons, but every adviser will have faced a situation where a customer has butted heads with the expert, despite every well-reasoned argument from the adviser.

In that respect, insistent clients have been around since the beginning of time. But did pension freedoms bring a new wave of determined-but-wrong clients to your doors, or simply bring them out of the woodwork?

John Vaughan, compliance manager for Mattioli Woods says: “It is more of an adviser’s term for clients who wish to transact business against our advice, and has been around for a long time.”

Sankhar Mahalingham, head of defined benefit growth for Xafinity, agrees: “We don’t believe it’s a new issue brought about by the freedoms.

“The combination of low gilt yields, which resulted in high transfer values, and pension freedoms have just exacerbated the issue.”

Mr Vaughan points out the term itself is not covered in the Financial Conduct Authority’s (FCA’s) handbook, although the FCA has “addressed the concept of insistent clients and, in particular, recently regarding pension transfers”, but he does believe pension freedoms “may have raised its profile”.

Regardless, Mr Mahalingham thinks the insistent client issue “is a major issue for trustees to get to grips with”.

Pensions review

Claire Trott, head of pensions strategy for Technical Connection, believes while the problem seems to be raising its head again now, it does echo problems in the past with insistent clients.

According to her, there have always been “issues” with clients who are advised to do one thing but want to go against the advice and do something different.

“This doesn’t even have to be related just to pensions,” she says, although there was one particular pensions situation that involved insistent clients, then just as now.

She says: “There was a real issue back in the late 1990s when we were dealing with the pension review cases, that clients had opted out or transferred their defined benefit (DB) schemes but the regulators at the time felt it was not suitable.

“The fact someone was a true insistent client or even execution-only back then was hard to prove from the documentation, and in most cases, the fact the adviser had facilitated the transfer or opt-out was enough to pay compensation.”

Earlier this year, FTAdviser reported that advisers who had to deal with the pension review cases back in the late 1990s have said the pension freedoms, coupled with low gilt rates, and high transfer valuations, have led to a rise in DB transfers that raises red flags.

In February, the FCA itself warned that individuals were at "serious risk" of getting the wrong advice to transfer out of their defined benefit pension schemes.

Documentation

This is why documentation is so important, and advisers have been meticulous in getting something in writing to show they have given advice, and to show the client has still decided to go against it.

The hope is that should a formerly insistent client decide 10 years down the line that they were not advised hard enough against a course of action that has seen them suffer financially, they could seek redress and it can be hard to prove one person’s word against another.

Ms Trott adds: “This is one of the reasons advisers are very nervous about dealing with insistent clients, and why they need to be very careful when documenting any help given to a client that is not following their advice.”

But not all believe documentation will help. Keith Richards, chief executive of the Personal Finance Society, comments: "There is no certainty a signed declaration or disclaimer will play in the event of a complaint by an unsophisticated or inexperienced consumer, who thought they were simply following the adviser's recommendations and didn't properly understand the true consequences.

"The conflict of interest and financial reward for the adviser may also play a part in influencing the view of an arbitrator," Mr Richards adds.

Future trends

However, Ryan Markham, head of member operations for Hymans Robertson, comments that certain changes already being implemented are helping to reduce the problem of insistent clients.

He believes: “Due to the additional flexibility for accessing benefits, and an associated shift in the weight given to the critical yield analysis in the advice process, we understand a lower proportion of insistent client cases are arising.

“Insistency now appears to be isolated to cases where the member is acting completely irrationally, for example transferring from a DB scheme and accessing the entire fund as cash, hence paying a huge tax bill, despite having no real need for that level of cash.”

According to a spokesman for the Personal lnvestment Management and Financial Advice Association (Pimfa): “If the client’s preference is within their risk appetite, and will meet the objectives – even if it is not the optimal solution – the advice can be tailored accordingly.

“Some firms with less flexible internal processes might require a client to confirm they wish to implement their own preference on an insistent client basis.

“In this case, there is no certainty of self-harm, more a case of a possibly sub-optimal selection compared to the adviser’s own recommendation. The risks here are modest, as long as they do not endanger the client’s overall financial situation, for example by taking them outside their risk profile and capacity for loss.”

As more regulation and greater education is brought to bear, it is hoped more individuals will be able to weigh up the pros and cons more rationally themselves, thus becoming less insistent, and perhaps more inquisitive clients.

simoney.kyriakou@ft.com