Alastair Black, head of financial planning propositions at Standard Life Aberdeen, warned stopping advisers from charging their clients based on actual business written, such as when a pension transfer is carried out, would fail to protect consumers because of certain behavioural biases involved.
For instance, asking vulnerable people, those with typically the least financial experience and available cash, to pay for advice threatened to push them into transferring no matter what so they could get their hands on their pension cash to pay for the advice and not incur debt.
His comments come in the wake of rival Aviva calling for a ban on the charging method.
The regulator asked in its latest defined benefit (DB) transfer paper whether contingent charging should be banned so that it cannot incentivise unsuitable advice.
The concern is that advisers, particularly firms which specialise in pension transfer advice, may be commercially dependent on a proportion of clients transferring, therefore the recommendation to transfer can be misguided.
Mr Black agreed the risk was there, as was seen in the transfer fiasco around British Steel, which prompted another round of regulatory reviews, but he added most advice firms in the market wanted the best for their clients so should not be affected by this risk.
Consumers, on the other hand, might be more prone to behavioural bias, such as the idea that money in the present is worth more than in the future and there is a risk they may try to mislead advisers during the advice process to get access to their money to pay for the debt incurred from the advice fee, he said.
The situation is exacerbated by the fact advice is compulsory for pension transfers worth more than £30,000, he added.
Mr Black said: "The most important issue about contingent charging is there's a conflict but getting rid of contingent charging is not necessarily going to solve that conflict but worse than that, it probably will create new ones.
"The most vulnerable consumers really don't understand and [therefore] don't get the benefit of generic guidance. If you don't do contingent charging you are going to have to tell them they will need to pay potentially £5,000 for the advice.
"It is those that have no spare money it creates enormous risks for. Either they [meet] the cost or they get themselves into debt in order to pay for the transfer advice.
"There is a risk they would be even more likely to transfer so they can get their hands on the cost of the advice from their pension."
Mr Black's comments come after Aviva argued on Monday (14 May) the use of contingent charging for DB transfers threatened to "further undermine trust in the pension and insurance sector".
Speaking to FTAdviser's sister title, the Financial Times, Andy Briggs, chief executive of Aviva UK's life arm, said a ban would be a "powerful way of making sure that only those clients that are genuinely interested [in the advice] engage with the process".
He said it would be an "extra guard against any potential rogue advisers in this space".
But Mr Black said there were other ways of managing the risk in contingent charging.
The FCA said it was concerned about advice firms passing on the cost of advice for consumers who do not transfer to those who do transfer in the form of cross-subsidies.
Mr Black said having in place a functioning triage system, whereby customers are given a type of guidance before they see their pension transfer adviser, would eliminate both these problems.
This is because people, who are often set on the idea of transferring before they approach their adviser, may be made to realise the potential consequences of doing so earlier on, which should effectively filter out a number of potentially unsuitable transfer clients.
In turn it would mean less cost from non-transfers has to be cross-subsidised within a firm, he said.
David Penny, managing director at Invest Southwest, said there was a "fundamental lack of understanding of our market and human nature in this debate.
"Whichever form of charging is adopted, there will always be an incentive to manipulate that method."
He said banning contingent charging would only help to deny access to advice to more people.
Mr Penny said: "This concept is a nonsense borne out of a failure to understand the problem. The solution is a totally explicit contract for services, explanation of fees and mutual agreement."
carmen.reichman@ft.com
