Defined Benefit  

Consolidator warns pension transfer firms on sale risk

Consolidator warns pension transfer firms on sale risk

Advice firm consolidator AFH has said it has seen an increasing number of firms which derive most of their new business from defined benefit transfers, and warned this would act as a "significant flag" against it buying the business.

The company's chief executive, Alan Hudson, said that while there was no set policy against buying firms which had this business model, it would be a concern.

He said: "I had a fact find pass across my desk the other day that had a huge number of DB transfers but, more importantly, the majority of those were insistent clients so it will come as no surprise that we didn't invite them in for a chat."

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Mr Hudson added: "What we are seeing is a lot of smaller businesses where a high proportion of their revenue is recurring so they are probably not recruiting as much new business as they used to.

"What we are seeing are firms where, when you analyse their new business, the DB transfers are a very high proportion of their overall new business.

"It is very easy now for smaller businesses to have more than 50 per cent of their new business in DB transfers."

Mr Hudson said DB transfers can often be in the client's best interests but he said that in the past five years AFH had recommended against a transfer in 74 per cent of DB transfer cases.

He added that he had seen evidence of professional indemnity insurers was turning against businesses which relied on DB transfers for their new business.

Mr Hudson said: "I have seen evidence of PI insurers saying 'we will not renew'. That is not necessarily down to bad advice, it is just risk management because such a high proportion of the new advice they are giving is DB transfers."

Earlier this year the Financial Conduct Authority said it was considering a ban on advisers charging for pension transfer advice on a contingent basis given what it said is the "potential harm to consumers".

Mr Hudson said he was not necessarily opposed to contingent charging, because a ban would probably push up the cost of seeking advice on DB transfers, making it less accessible.

He said: "It all comes down to culture. I am seeing more and more firms charge less up front for the financial planning work they do and the argument is they are getting that for the recurring income.

"As a financial planner you add more value in the first six to 12 months of a relationship and you should charge for that work.

"If you don't charge anything for the up-front work because you will get the recurring income then the natural conclusion is that there was a fee, but you are amortising it as recurring income. And if you are doing that then how long should that be happening for?"

Mr Hudson also expressed scepticism about advisers who charge for financial planning based on the size of a client's assets if they outsource the investment to a discretionary fund manager.