Defined Benefit  

Adviser rebuked after DB transfer not in client’s ‘best interest’

Adviser rebuked after DB transfer not in client’s ‘best interest’

An advice firm has been ordered to pay compensation after it incorrectly assessed said a client wanted to take high risk investments when deciding to go ahead with a defined benefit transfer.

The Financial Ombudsman Service found Copia Wealth Management gave unsuitable advice when suggesting its client should transfer out of his DB scheme and should therefore pay compensation.

The issue first arose in 2014 when the client, who the Fos called Mr L, was referred to CWM by a third party .

As part of its process, CWM prepared a suitability report and recommended that Mr L transfer his DB pension into a self-invested personal pension so he could take his £10,000 tax free cash and invest the remaining £34,000.

Mr L has since made losses on his pension and decided to complain about the advice given to the Fos.

The Fos decided to uphold Mr L’s complaint after finding the adviser, in the suitability report, had incorrectly assessed that Mr L was prepared to take a high level of risk.

Ombudsman Keith Taylor said it was not clear how this assessment was reached or how it could be justified as Mr L did not have any investment experience.

His earnings were also below the national average at £19,000 a year and he had only a small amount in savings.

Mr Taylor said: “There was little, if any, capacity for loss. I agree with the investigator that Mr L’s circumstances don’t present a picture of a typical high risk investor.”

In the suitability report, CWM recommended investment in a portfolio which meant a discretionary fund manager would decide where to invest the funds. 

The portfolio would typically invest 75 per cent of the funds in property, which Mr Taylor described as a “narrow investment strategy” with a “lack of diversity” and therefore presented a higher degree of risk than Mr L ought to have been advised to take.

The Fos also found the Sipp was more expensive than the DB scheme.

Mr L paid initial charges of 3 per cent to CWM and £260 for the Sipp and then ongoing fees of £210 a year and an annual managers charge of 1.5 per cent for the Sipp and an annual  adviser charge of 0.5 per cent to CWM.

According to the Fos, the critical yield required to match Mr L’s DB benefits was 3.6 per cent, but this would need to be 2.5 to 3.5 per cent to cover the charges.

This means that a higher investment growth was needed to match the DB benefits Mr L was giving up. 

Mr Taylor said: “This means that Mr L would have needed to take a high degree of risk with his investments and probably invest largely in equities. And, as I’ve said, I don’t think he ought to have been classed as a high risk investor.”

The Fos therefore concluded that the advice given to Mr L was unsuitable and was not in his best interest.