REPLACEMENT BUSINESS: WHERE FILES FALL DOWN

Love them or loathe them, file reviews are an important part of a firm’s monitoring and oversight.

Whether you complete them internally, or outsource to a compliance consultant, it is important you select the right files for review. By ‘right’ we actually mean risky. For most firms, this is going to be ones concerning replacement business.

Life for a financial planner would be much simpler if all new clients’ only priority was to invest cash they’d won on the lottery or inherited from an obscure relative. However, the reality for most firms is that clients come with baggage.

The type of people that typically need or want to pay for financial advice have existing investment products, previous advisers or old pensions with scheme documents so complicated you need a PhD to read them.

So, whilst moving a client onto your own proposition, whatever or whomever that is with, might seem straightforward, there are risks (even more so with pension switching) that a business needs to monitor to ensure the best outcomes.

The ground rules for replacing investments

It has been a while since we’ve had new guidance in this area. So long in fact it wasn’t even published by the FCA, but its predecessor, the FSA. Whilst it might be old, it is still used now by both the FCA and by extension, the FOS, upon which to base their feedback.

The 2012 papers highlighted concerns and poor practise that could result in poor customer outcomes and demonstrated why robust processes and controls are needed when recommending an existing investment is replaced.

Sadly, despite the longevity of this guidance, as well as repeated findings and decisions from the FCA and FOS in the intervening years, we are still seeing many of the same old issues in the file reviews we complete today.

What makes a good file review?

It’s safe to say we have looked at a fair few replacement business cases over the years. So, what are the common pitfalls you need to consider?

Client objectives:

Even before we look at the ceding scheme documents, we want to see that an adviser has demonstrated in the file what the client’s needs are and what they hope to achieve in the longer term. All too often, we see objectives that are actions. For example, “your objective is to consolidate your pensions” or a lack personalisation, stating the client is “seeking growth over the long term.

A good objective should tell a story. Why does the client need growth, what do they want to do with this in the longer term and when do they need to achieve this by? When an objective is well structured and sufficiently detailed, it can support the advice to switch by illustrating how the actions will help towards achieving the client’s objective.

Cost:

It goes without saying that every switch needs to compare fees and charges and highlight where there is an increased cost. However, it is a common misconception that a higher cost means a switch would be unsuitable.

If you can lower the cost, great, but an increase in isolation shouldn’t be a barrier to switching. You need to show the additional value for the extra cost or how the new proposition will help the client to achieve their objectives (see what we mean about those objectives?!).

Often, we will see statements such as “you are happy with the increase in cost as you want to receive our ongoing services.” In our opinion, this doesn’t tell us why the client values the service or would benefit from the switch.

Where a switch is needed to access your advice, why not try, “through our discussions, you have told us you need help with your pensions, as you are concerned that you won’t achieve your goal of retiring early.” We are unable to make or instruct changes within the current scheme and you have said that you don’t feel comfortable doing this on your own.” To show why switching is the best outcome, despite an increased cost, use the client’s own words, or refer to their needs and priorities.

Guarantees:

We are not talking about safeguarded benefits here, that’s another conversation. We are talking about enhanced PCLS or guaranteed growth rates.

The presence of a guarantee doesn’t mean you shouldn’t switch – you must simply show that this is the best outcome, or that there is a greater benefit to switching. We often see cases where an enhanced PCLS is being given up on the basis there is a compulsory annuity purchase and the new product has flexi-access drawdown.

In this scenario, you need to consider the client’s wider retirement income plan. Do they have sufficient secure income? If not, would a secure income be beneficial to the client or would this push them into a higher rate tax band? Flexi access drawdown in isolation is a feature of a product, not a benefit and your file will need to reflect that having access to this facility, rather than a secure income and enhanced PCLS, is a more beneficial outcome.

This is not an exhaustive list and there are many moving parts when writing and reviewing replacement business. But why not think about these points when you’re next looking at a switch alongside your normal processes?

If you would like to know more about how to enhance your replacement business or pension switching recommendations, don’t hesitate to contact us. Call (0161) 521 8641 or email: info@b-compliant.co.uk and we can discuss how B-Compliant’s support could benefit your firm.