Although the investment pathways proposals following the Retirement Outcomes Review (ROR) are largely aimed at direct customers – there are areas of the rules that will impact financial advisers and their clients that are not being talked about.
What do you need to know?
When your client applies to enter drawdown in their SIPP a provider will typically ask you to confirm that you have provided them with advice on their retirement and the option they have chosen.
Under the proposed new rules, providers will be obliged to ask for additional information from your clients directly. For example, even if you have confirmed that you gave advice on the retirement option (i.e. drawdown) a provider will then have to ask your client whether or not they have “received a personal recommendation on the investments to be held within the drawdown fund in the last 12 months.”
This will be at the first time they take benefits from their pension, but crucially for those who are not fully crystallising at outset, also on every subsequent occasion they apply for further drawdown benefits.
We have a number of concerns regarding this that we have raised with the Financial Conduct Authority (FCA) on behalf of advisers through various means, and have suggested various alternative solutions. But as things stand in the consultation process the rules remain drafted as set out above, potentially with little prospect of wholesale change.
One of the main issues we have with the proposals is that we don’t see the benefit to your client in a provider having to disturb your relationship with them and contact your clients in this manner, particularly where our process would mean we have received a signed declaration from an adviser that the client has received advice on the drawdown option they have selected.
Although an advised client who confirms they have received a personal recommendation will exit the pathway process at this stage – the FCA say that “…advisers should consider pathway solutions when advising.”
The rules feel like they are a little over prescriptive to us, using a sledgehammer approach in attempting to solve a problem that doesn’t really exist for clients with advisers.
Secondly – there is an issue with the proposed language here. When a client is asked the question, will they understand what a “personal recommendation” in relation to drawdown investments actually means? The industry is already full of too much jargon and what might sound like a question with a clear meaning to you, me or the regulator isn’t necessarily going to be understood in the same way by a lay person.
For clients who are paying for a full advice and ongoing investment review service this question will be irritating and an unnecessary disturbance when they are paying an adviser to take care of all their retirement planning, investments and the whole process for them.
At worst – if the client misunderstands the personal recommendation question and answers no – the provider will then be forced to take the client into the same process that the FCA rules propose for direct customers without an adviser. This process involves offering your client an investment pathway, whether or not they already hold investments within their pension scheme that you may have advised upon. And once your client is in the pathway process even if they, or you, tell the provider that they’re not interested in an investment pathway, the provider will still be obliged to nudge your client into questioning whether they’ve made the right choice.
What is the answer?
The scope for further representation on this issue to attempt to get the rules changed is now severely limited. Providers now face the challenge of exploring and suggesting ways to the regulator as to how they can collect this information without having to contact your clients directly.
Charlene Young is senior technical consultant at AJ Bell