Should my business appoint a captive IFA?
27 November 2017
This article was featured in the December 2017/January 2018 issue of the magazine.
Henry Tapper, of First Actuarial, looks at the business case that accompanies such appointments
Two top pension consultancies have recently urged their clients to hook up with a reputable independent financial adviser (IFA) to "maximise the employer value proposition". Well, that is how it is sold to human resources (HR) but the finance director (FD) gets a different message: the IFA is there to de-risk the balance sheet and minimise pension risk.
To be fair, pension consultancies like Willis Towers Watson and Lane Clark Peacock are not recommending their own IFAs. They are suggesting partnerships where regulated advisers are on hand to deal with the questions that HR avoid which typically start "I know you can't give advice but..." and end with a disgruntled employee being introduced to unbiased.co.uk.
The advantage of having your own ‘man from the Pru’ is the zero risk. The IFA can provide up to £500 of advice (including VAT) at your expense without it becoming a benefit in kind. And should your employee be prepared to pay for advice about their defined contribution pension, a further £500 can be taken from their pension pot to meet its cost. So, financial advice is becoming a tax- and risk-efficient employee benefit. The disadvantage of paying for a captive IFA is that there is traditionally no budget for it.
Things are easier if there is a defined benefit (DB) scheme. The FD's usual stern disposition can be warmed by the prospect that any residual liabilities in the (now closed) DB scheme can be removed from the balance sheet considerably cheaper using a voluntary transfer than through a bulk buy-out policy.
Having won the FD’s heart, there is considerable upside for HR. The flex programme which cost a fortune, but is hopelessly under-valued, can now be promoted with impunity by the third party. Ageing employees with retirement in sight can find a helping hand to lead them into the sunset. Striving executives can have their lifetime and annual allowance issues put to bed and workplace pension savers can have the pension freedoms dangled before them as a thrift-inducing carrot.
If this sounds too good to be true, you probably have the dim view of IFAs that has prevailed for two decades since the pension mis-selling crisis. Since then, IFA numbers have fallen from over 60,000 to just over 20,000. The major driver in this reduction has been abolition of commission on pensions; IFAs receive no commission on sales of workplace pensions.
Along with this cut in revenues, IFAs are now subject to considerably tougher training and qualifications putting them on a more equal footing with other professional advisers. Expect to pay an hourly rate for a good IFA of between £150 and £200 (+VAT). Top IFAs are now switching to a fee-charging model so that advice can be truly independent.
Without a DB scheme to de-risk, the business case for a captive IFA looks tougher to construct. Any cost is hard to justify if advice was previously assumed to be free.
For employers that still want IFAs to advise for free, an alternative model sees IFAs promoting their own ‘vertically integrated’ savings products where the annual management charges include a proportion paid to the advisers, notionally for their part in the investment management. Fees are often waived if in-house savings products are purchased – a practice known as ‘conditional pricing’ which looks like commission under another name.
...employers may well decide to ‘wait and see’
Nonetheless, ingenious pricing structures enable HR departments that cannot afford hourly rates or fixed prices to pass on these costs to members through higher investment costs. The IFA can properly offer choice of pricing structures, though how well-disclosed the difference is to the employee is open to question. As employees are now being asked to take all the other pension risks, employers adopting the ‘free advice’ model are running some long-tail risk, especially if the impact of ‘fee-drift’ is likely to be recognised by staff.
Meanwhile, arcane arguments over whether employers need to provide advice or guidance continue. The Financial Conduct Authority (FCA) has an ongoing study on the question and increasingly looking at workplace guidance as a solution to the problem of less-wealthy people not being prepared to pay for advice. The accepted wisdom is that guidance is anything which isn't the provision of a definitive course of action. Put another way, so long as an employer is not telling staff where to invest and how to organise their affairs, then they are providing information.
Ironically, most of the best-informed pension experts do not want to give advice, partly because of the perceived stigma attaching to IFAs and partly because the added costs of regulation make it difficult for such an expert to charge cost-effectively.
We await a sustainable answer to the question in the title. The Competition and Markets Authority is investigating ‘vertical integration’, the FCA is probing ‘conditional pricing’ structures, and the boundaries between advice and guidance remain unclear. With such a fluid regulatory situation, employers may well decide to ‘wait and see’.
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*content correct at time of publishing