PensionsNov 2 2017

Pain points with insistent clients and DB transfers

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Pain points with insistent clients and DB transfers

“They are ultimately acting against an advice recommendation and hence, in the view of the financial adviser, taking a decision which is not in their best interests,” says Ryan Markham, head of member options for Hymans Robertson.

But while this might cause some to question why the powers that be simply rule out any possible harmful activity, this would go against the freedom and choice principles.

The problem is, very insistent clients can do something that ends up not just hurting them, but also the advisers who dealt with them, even in a minor way.

For example, in 2015 Financial Adviser reported on the case of a mortgage broker who helped a woman remortgage her property to free up some funds for her, only for her to go and blow it all on a spurious Bulgarian buy-to-let scheme.

She then took the adviser to the Financial Services Ombudsman to claim if he had not allowed the remortgage, she would not have been tempted by a scheme she had seen.

Despite all logic, the Ombudsman upheld her complaint, even though the broker in question had no way of knowing she was speaking to another offshore adviser about investing in Bulgarian buy-to-let. More than 110 comments supported the adviser in question.

DB transfers

However, the question of insistent clients becomes most problematic in the case of defined benefit (DB) transfers.

Sankhar Mahalingham, head of DB growth for Xafinity, comments: “A DB transfer is very valuable, especially in the current environment.

Clients will have made up their mind before the advice process has even started and will want to short-cut the rules to access their funds sooner. Claire Trott

“It is generally the largest or second largest asset an individual has. Transferring is an irreversible decision and, of course, very important.”

A spokesman for the Personal Investment Management and Financial Advice association (Pimfa), attempting to transfer a DB scheme to a defined contribution scheme is an example of a “most extreme and high-profile” instance of potential self-harm.

The spokesman explains: “DB pensions usually carry guaranteed benefits, with the risk of poor investment performance carried by the employer, rather than the employee.

“Legislation in recent years has forced firms to offer members the option of a transfer, albeit they must demonstrate they have taken regulated advice.”

In a nutshell, while pensions freedom rules mean people do have the right to get at their money, legislation also exists to mitigate the likelihood of them transferring against their best financial interests.

This illogical situation has created a minefield for advisers and pension transfer specialists, who are finding more than ever that prospective clients are coming to them not asking what they should do but rather telling the adviser what they have decided to do.

Claire Trott, head of pension strategy for Technical Connection, believes the particular pain points with clients wanting to do defined benefit transfers is not so much the administration and processes, but the fact “clients will have made up their mind before the advice process has even started and will want to short-cut the rules to access their funds sooner”.

Realism

Although this is impossible, as the adviser must go through the correct procedure, clients can still ratchet up the pressure.

Moreover, as Ms Trott explains, providers may be nervous of insistent client transfers, so won’t accept the transfer, which will restrict the options available to the client.

“In addition”, she states, “some clients will just not want to take or pay for advice at all.

“Advisers may therefore find the client is unhelpful and makes the process harder than it needs to be.”

This is born out by research carried out recently by Momentum Pensions, which found this is a significant worry for advisers.

The research showed:

  • 63 per cent of advisers say their biggest concern about the rush in transfer business is the risk of facing future liabilities from advice being contested by clients.
  • 58 per cent of advisers would like rules stipulating DB transfer funds should be invested in solutions which offer capital protection and hedges against inflation and volatility.
  • 47 per cent of advisers have seen an increase in clients disagreeing with DB recommendations.
  • Nearly two out of three are concerned about potential future complaints.

Considerations

But as John Vaughan, compliance manager for Mattioli Woods suggests, to get around this challenge is to “understand the client’s requirements and look into what they already have that could be used to meet those requirements”.

One way round the difficult situation, he suggests, is in investigating the “realism” of a client’s expectations and contrasting how retaining the scheme or transferring it would help meet those expectations.

“One has to remember in all of this, the client will need income in retirement and therefore one has to consider how this will be provided.”

In some cases, therefore, by looking at every possible angle, the client may realise their needs can be met through a different course of action, and will not need to transact.

Moreover, a very serious consideration is the potential detriment of investment returns if a client leaves a DB scheme to invest in a DC one, where they will bear all the risk of market movements themselves.

Keith Richards, chief executive of the Personal Finance Society, says: “Insistent client declarations provide no certainty of future treatment for advisers and it is naïve to think otherwise, unless dealing with a clearly sopthisticated or experienced investor who is more likely to understand the consequences of acting against professional advice.”

One of the biggest consequences is market volatility which can erode returns early on in retirement, a situation from which funds may not recover. An unsophisticated client is unlikely to grasp this consideration.

Mr Richards adds: “So many people are choosing to transfer out of DB schemes that the risk of volatility in the future could itself lead to exposure for both the client and the adviser.

“We have already seen this in the US, where they have been used to pension freedoms for a much longer period.”

Providers

Even when the adviser is prepared to help an insistent client, having gone through all the necessary suitability checks, Martin Tilley, director of technical services for Dentons Pension Management, says there could still be an issue.

He comments: “They could find a significantly smaller pool of potential providers to choose from. This is because, like advisers, providers will always have their own view on the acceptance of insistent clients.

“As a provider, if a client has taken DB advice and the advice was not to transfer, then we will not accept the case, even if the adviser decides to place the business on an ‘insistent client basis’.”

Mr Tilley explains the rationale for this: “We are not transfer specialist advisers, so on what grounds could we facilitate something which a transfer specialist has confirmed is not in the client’s best interests?”

He says Dentons would rather turn down the business than have a client suffer a bad outcome – and then, through the claims management firms, suffer complaints thrown “at any party” who was involved.

Dentons is not alone in this: many providers have been wary of allowing people to transfer their money to unregulated or offshore investments.

Everything that can provide income has to be included in the equation and all options to transfer explored and covered off. John Vaughan

According to a spokesman for the Personal Investment Management and Financial Advice Association, some pension providers will not accept any DB pension transfers, where the advice was not to transfer.

The reason? “It is why just as many advice firms will not advise on DB transfers, viewing the risks of poor client outcomes, complaints and future regulatory and supervisory censure as too great.”

Ryan Markham, head of member options for Hymans Robertson, warns: “Many reputable and cost-effective investment providers will not accept transfers of funds from insistent clients.

“This pushes members to the murkier side of the market, where they are at even greater risk of paying high charges for poor quality products or, even worse, falling victim to a pensions scam.”

In the event…

Mr Mahalingham says it is not unreasonable for advisers to recommend “no transfer” and that, in many cases, the individual in question is “making an ill-informed decision".

“In such circumstances, there are many ways in which a transfer can go wrong. There is the risk of inappropriate investment, poor member choices, and spending the money too quickly.

“In the extreme, there is the possibility of individuals falling back on the state, having wasted valuable DB pensions,” he says.

This means advisers who are being sought out to provide the advice demanded by legislation for pots over £30,000 must make sure they have presented every possible scenario for the client.

As Mr Vaughan says: "Transfer advice has to be holistic. Everything that can provide income has to be included in the equation and all options to transfer explored and covered off.

“Assuming then the above has not resulted in a client being able to achieve their goals, the risk in an adviser walking away is that the client looks for someone else who will facilitate their chosen course of action.”

simoney.kyriakou@ft.com