The FCA has today announced that it is banning contingent charging in relation to defined benefit (DB) pension advice in order to reduce conflicts of interest in the market.
Following the announcement, technology firm, Wealth Wizards has announced the launch of an automated abridged advice service.
The end of contingent charging
The announcement to ban contingent charging comes from the FCA as it seeks to remove the conflicts of interest present when a financial advisor only gets paid if a pension transfer goes ahead.
Christopher Woolard, Interim Chief Executive of the FCA said, “The proportion of customers who have been advised to transfer out of their DB pension is unacceptably high[,] we are still finding too many cases in which transfers were not in the customer’s best interests.
“Customers need to have confidence that the advice they are receiving is right for them. The steps we are announcing today will drive up standards.”
Implementing abridged advice service
As part of the announcement, the FCA has said it will implement proposals that enable financial advisors to offer an ‘abridged advice’ service; a more affordable service for customers seeking initial DB advice.
The abridged advice service will only be permitted to instruct customers not to transfer their pension or to provide the customer with a statement outlining that it is unclear whether or not a transfer is advisable without seeking full advice.
Introducing algorithmic advice
In response to the FCA’s announcement, fintech firm, Wealth Wizards has said it is launching an algorithmic abridged advice service.
The firm has said it welcomes the FCA’s decision to introduce abridged advice, however, it expects the service to prove ‘resource-intensive’ for financial advisors who fail to implement technology to deliver the new service.
Speaking via a press release, Wealth Wizards CEO, Andrew Firth said, “technology can streamline and modernise the market in the wake of the ban on contingent charging. It will enable advisers to automate key parts of the advice process, costing just a fraction of the traditional advice process. Relying on digital, compliant abridged advice will reduce risk considerably. This scenario will be both better for the adviser and for the client.”
At it’s core, the new technology provided by Wealth Wizards will enable financial advisors to deliver a digital abridged advice service, meaning they can automatically filter out customers who are unlikely to be advised to transfer their DB pension.
Firth said the abridged advice service “will do much to help firms deliver low-cost advice to clients who should not transfer. Many firms want to keep their fees at a minimum – particularly for those who should not transfer[.]
“The answer is to automate the service with technology that is able to deliver fully-regulated abridged advice. This will speed up the triaging process, bringing down costs and providing a record of explainable and consistent outcomes, significantly reducing regulatory risk.”
Analysis – good news for customers
Advice is only good if the motivation for providing it is sound. For too long, financial advisors have been able to collect their fees on a contingent basis, benefiting financially only when a customer is advised to (and indeed, does) transfer pension.
This isn’t to say that all advice delivered on a contingent fee basis is bad advice, but for every good piece of advice delivered, there’s the potential for another customer to be advised to transfer when that isn’t the best outcome.
The problem at the other end is that customers cannot always afford to pay high fees for a full professional advice service, particularly where the advice at the end is simply to say, ‘stick to the status quo’.
Enabling advisors to offer a regulated abridged advice service makes great sense. Customers will benefit from paying for a slimmed-down service and in cases where a transfer isn’t advised, won’t feel short-changed.
Advisors, too, should benefit from being able to deliver a simpler service in order to sort the clients who do need full advice from those who don’t.
The challenge is one of efficiency. Delivering a new service at a lower fee to a potentially growing market of customers could soon become a game of spinning plates. Smart financial advisors will develop processes that leverage automation as much as possible.
With this in mind, today’s launch from Wealth Wizards is shrewd and pitched well at an advice sector that will be looking at how to respond quickly.
The end result could be good for all involved. Time, of course, will be the true test.