Discounting advice options

A question that pops up from time to time is whether there is a need to discount potential options that are not being recommended. This was something that, in the early days of regulated advice,  a few firms used to require advisers to include in suitability reports. Some still do.

However, there has never been a rule requiring advisers to explicitly discount use of all other options in ‘normal’ (i.e. non DB Transfer) advice. If there were, suitability reports would be even more unnecessarily lengthy than many already are. The client would have to wade through pages of ‘I have discounted National Savings because …’; I have discounted direct equity investment because …’ etc. There would be reams of text that add no value to what the client is really interested in, i.e. what the adviser is actually recommending. And the general truism of the more wood there is, the harder it becomes to see the trees would certainly kick in – an overload of ‘information’ resulting in a reduction in clarity.

There are two exceptions to this general position.

First, there is a longstanding rule requiring consideration of stakeholder when advice on pensions is in play. Advisers will be very familiar with this. It did not take advisers very long to come up with reasons not to use a stakeholder solution. According to the FCA, the most common was a brief generic paragraph about lack of fund choice or some other bog standard get out clause! Here is what the FCA stated:

“Stakeholder is mostly discounted because of:

  • inadequate fund choices …
    “Yet, in many cases, advisers are not able to articulate the need for a vast selection of funds.”
  • the client needs the adviser’s ongoing advice service …
    “We have seen firms recommend more expensive schemes on this basis”

These reasons still appear in some suitability reports despite the fact that the most valid reason for not using a stakeholder nowadays is that many of the non-stakeholder plans are actually less expensive than the stakeholder option. Which just goes to show that firms should review their suitability letter templates from time to time and update/amend things such as this.

Second, would be the situation where there are two or more closely matched viable options. This doesn’t mean advisers always have to discount, for example, Investment Bonds every time they recommend a DFM or OEIC portfolio. But it would make sense to explain the onshore and offshore options if a bond was being recommended and why one was being discounted and the other recommended to the client concerned.  The same might apply if an IHT plan was being recommended – why the discounted gift as opposed to the loan version?

Alternatives to transferring safeguarded benefits

However, with transfer advice, the rules and guidance in COBS 19 do include a requirement to consider alternatives to transferring. Transfer advisers will be familiar with the FCA’s ‘starting point’ for transfer advice namely:

“When a firm is making a personal recommendation for a retail client who is, or is eligible to be, a member of a pension scheme with safeguarded benefits and who is considering whether to transfer, convert or opt-out, a firm should start by assuming that a transfer, conversion or opt-out will not be suitable. A firm should only consider a transfer, conversion or opt-out to be suitable if it can clearly demonstrate, on contemporary evidence, that the transfer, conversion or opt-out is in the retail client’s best interests.”

In order to achieve compliance with that the suitability guidance requires advisers to consider all “alternative ways to achieve the retail client’s objectives instead of the transfer, conversion or opt-out.”

And of course there is a specific rule, where a transfer is being recommended, that an available workplace pension should be the destination for the transferred funds unless an alternative personal plan can be shown to be MORE suitable. The rules and guidance around this aspect are quite prescriptive in terms of what reasons for discounting the workplace pension are likely to be acceptable. See here for our detailed article on workplace pensions in relation to pension transfers.

Important Note: ATEB news is intended to provide general information ONLY. The content, including any views expressed or guidance provided, does not replace the need to comply fully with FCA Rules and Guidance. Unless you have discussed news article content with ATEB, and specifically how it relates to your circumstances, then ATEB disclaims all liability and responsibility and actions arising from any reliance placed upon it. For the avoidance of doubt therefore, any reliance you place on such information without our consultation is at your own risk.

ATEB Compliance offers compliance and regulatory advice.

ATEB Suitability provides report writing software for the financial services market.

Our View

The article refers to the desirability of reviewing the content of suitability letters to ensure they remain accurate and up to date. We unashamedly take this opportunity to highlight that Suitability, ATEB’s very own powerful report writing software is automatically updated as required with no effort from users! We also have an options analysis template available to ATEB clients who provide advice on pension transfers.

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About the Author

Technical Manager - Often referred to as the Oracle or the Sage, Alistair has a wealth of financial services experience. He is our go-to Technical Manager and enjoys nothing more than a complicated conundrum. Feel free to test his renowned knowledge by getting in touch.

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