The Financial Conduct Authority should focus on “sharpening up” guidance on drawdown advice instead of launching another lengthy investigation, according to an adviser.
Alastair Rush, principal at Echelon Wealthcare, said the FCA does not need to carry out an investigation into the suitability of pension decumulation advice but could instead sharpen up its guidance to ensure that advisers do not use drawdown as the default option.
Mr Rush believes many advisers have turned to drawdown by default as annuity rates plummeted instead of seeking out all the viable options in decumulation.
He said: “I don't think that advisers are actively telling clients to stay in drawdown to insidiously and solely earn more in fees. I do think though, that drawdown has become the default option and it might be the case that an investigation might not be needed, but instead, simply a sharpening up of the rules.
“The markets have been doing quite well for as long as many of us can remember and annuity rates have been poor so it might be the case that the advice thus far has been correct.
“An issue though, which is immune from that 'excuse', is differentiating the desirables from the essentials. We don't look long and hard enough at partial annuities to cover the core essentials (food, council tax, utilities etc), and then having a drawdown in orbit, circling around that, allowing them the flexibility that they might benefit from.”
The FCA yesterday (March 7) confirmed it is to push ahead with its investigation into the suitability of pension decumulation advice.
This comes after it raised concerns in February about consolidation in the advice market incentivising advisers to recommend products with ongoing fees, when they might not be suitable, in a bid to boost revenue streams.
However FTAdviser understands this probe is currently on hold due to the coronavirus and the regulator cannot say at what point it will continue at this stage.
Other advisers have welcomed the review but said the regulator needed to “dig deeper under the surface” rather than focusing on conflicts of interest.
Krupesh Kotecha, financial planner at Balance Wealth Planning, said: “The regulator making a start into looking at this is the right step.
“I hope they will look beyond a firms ‘conflicts of interest’ policy or other governance structures and look deeper into the culture of the firm and the client outcomes being delivered. Everyone says they put clients first – the only way to know for sure is to dig a bit deeper under the surface.”
He added: “I'd like to believe that with decisive action from the regulator this will put a stop to such practices. The financial services profession, on the whole, has been working very hard to gain the trust of the public, and it only takes a few rotten eggs to set everything back again.”
Rachael Hall, head of medical service at Sandringham Medical Financial Planning, said advisers could justify putting people in drawdown and charging ongoing fees if they could show added value.
She said: “No adviser should be recommending any product on the basis of picking up ongoing fees. All clients should be fully educated on their options and the value of income security at retirement.
“Planning should be carefully considered, over a reasonable period of time in the run up to their retirement - not rushed through at the last minute.
“Trusted client relationships are integral to a healthy advice market and where fees are taken from decumulation products, an adviser should be able to demonstrate added value.”
But she agreed consolidators could be contributing to the focus on revenues rather than what is best for the client.
Ms Hall said: “There is the opportunity for conflicts to arise when a business is concerned with its Aum figures, rather than the client outcome. The way in which firms are bought by consolidators contributes to this.
“Companies need to be more transparent about what retirement products they can and cannot advise upon, clients can make informed decisions about whether this is a holistic service.”
Meanwhile Alan Chan, director and chartered financial planner at IFS Wealth and Pensions, said advisers should be made to review their drawdown advice each year to assess its suitability.
Mr Chan said: “Advisers must always consider the suitability of a product to the client first and foremost, without regards to ongoing fees. This is true in any area of financial area not just pensions.
“Likewise, drawdown must first be suitable for the client and this has to be reviewed each year to consider the continuing suitability of the product and merits of an annuity instead and the clients’ views.”
Mike Lacey, principal at Bowman Pension Consulting, was concerned the FCA’s probe may undermine the need for ongoing advice on drawdown.
He said: “Fees are pretty transparent nowadays; not only are they expressed in percentage terms, but they are also expressed in actual monetary figures. Clients know exactly what they will be paying, and advisers should be able to justify this.
"I would feel hugely uncomfortable if a client asked me to put them to a product such as drawdown and refused to engage me for downstream advice. There are just too many variables and too many opportunities for clients to simply get it wrong.”
amy.austin@ft.com
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