In our article ‘Pet hates of a file reviewer – part three’ published in our last newsletter of 2019, we mentioned that issues around replacement business would merit a dedicated article. This is that article.
Replacement business, usually pension switches, features large in many firms as a source of business. There seems to be very little advice nowadays that relates to ‘new money’. Most advice seems to focus on ‘reviewing’ the client’s existing investments and pensions. Unsurprisingly, those reviews often lead to the existing plans being found ‘wanting’ in some way and a switch being recommended.
Unfortunately there is often an absence of the required costs and features comparison or a comparison done ignoring adviser charges. Otherwise, even where the costs comparison is done properly, there is often inadequate rationale for the switch.
There are around nine common reasons advisers give for recommending a switch and most do not usually stack up where the switch results in increased costs. We list those reasons below and offer comment.
| Reason | Our view |
| The new arrangement will reduce costs for the client with a consequent reasonable expectation of a better return over time. | If, having done an appropriate costs and features comparison, the overall level of charges can be reduced, it is likely, all things being equal (and without loss of an essential feature) that the switch will produce a positive outcome for the client and the switch is likely to be suitable. |
| Note that all the reasons shown below must always be weighed against any increase in costs and a reasonable judgement made as to whether the ‘benefit’ will justify the increase in costs. The increase in costs is often not justifiable against ‘vague’ benefits such as ‘greater fund choice’ and similar. There are regular reports of FOS cases where complaints are upheld against advisers for this very reason. As a minimum, the FOS can require the firm to refund all fees plus interest but the cost of redress could be even more in some cases. | |
| Consolidation of multiple plans into one. | If consolidation is to bring a coherent investment strategy to bear on several existing plans that have a disparate and arguably random set of investment links, then that is likely to be a strong reason for switching, although consolidating to one of the existing plans should be considered.
Consolidation to ‘simplify admin/paperwork’ is likely to be less credible and less able to stand up to scrutiny. The client’s existing ‘admin/paperwork is not likely to be significant and, in any case, would probably simply be replaced by a not significantly different amount of paperwork in any new arrangement – arguably a lot more when initial disclosures/ illustrations, suitability reports etc. are taken into account. |
| Existing plans do not match the client’s ATR. | In this situation a switch could be justified. However, consideration should be given to whether the risk profile(s) of the existing plan(s) can be adjusted to resolve the mismatch. They usually can. |
| Existing plans do not have ‘sufficient’ fund choice. | This is unlikely to be strong reason for switching unless it can be clearly shown that the client has a need for a fund choice beyond that which is available in the existing plan. No client needs access to hundreds of funds and to use this as a reason for switching is problematic unless that need is genuine and documented. In addition, if the plan were to be switched for this reason, then a recommendation made to invest in only one or two funds, the reason would be embarrassingly weak. The FCA has commented adversely on this many times. |
| Existing plans do not allow access to the funds I am recommending. | This is only a justifiable reason to switch if the funds being recommended offer some benefit that cannot be obtained similarly within the existing plan. Just because the existing funds are not funds that the firm normally uses is not sufficient reason. There are many funds that any one firm does not tend to recommend that are nonetheless perfectly reasonable funds.
Many firms have a centralised investment proposition – complete with a preferred platform and model portfolios. That is fine, but it is important to remember that, just because you prefer it, does not make it an automatic no brainer right solution for every client. Sometimes, more often than might be thought actually, what the client already has is perfectly good |
| Better performance. | It is unlikely that this would be a strong reason to switch, because it is not ultimately possible to predict future performance. It is certainly not possible to guarantee better performance – even if the existing plan looks to have had poor performance in recent years, it is entirely possible that it could perform better, or even well, in the coming years. |
| Poor performance. | This reason is more likely to be credible but requires sufficient research to make a good case that not only has the existing plan under-performed against any reasonable measure, but that the under-performance has been consistent over a reasonable period of time AND that there is no reason to expect that the performance will change in future. The research and thought process should be fully documented. |
| With Profits Plans. | With profits plans are not in vogue with many advisers these days, being considered, old fashioned, lacking in transparency and many with profits plans have had a poor bonus record for several years. However, when considering a switch from a With Profits plan, it is not sufficient to simply assume that it should be switched to a more transparent, modern plan. Consider the following regulatory statement:
“Where an adviser has recommended a switch out of a policy because it invests in a with-profits fund, we would expect the adviser to provide analysis of the ceding with-profits fund beyond simply noting the existence (or lack) of MVA penalties, terminal bonuses and the recent reversionary bonus history.” (FSA – 2009 guidance on switches) |
| Existing plan does not support Facilitated Adviser Charging. | This is unlikely to be a valid reason for switching.
FG 12/16 – Finalised guidance … Assessing suitability: Replacement business and central investment propositions “We expect firms to consider all of these factors and clearly demonstrate the benefits of a new investment proposition before recommending a switch out of a client’s existing investment. the charges of the recommended investment; We do not consider the ability to facilitate adviser charging to be adequate justification for switching to a new, higher cost solution.” |
Tax Year End Update
Doug McFarlane Suitability 2024, Pension, transfer, Update
Our report writing software has been fully updated on 6th April 2024 to accommodate changes to allowances, rates and reliefs for the 2024/25 tax year. Full details can be found below: Pensions Existing ‘Lifetime Allowance’ wording removed and replaced with new ‘Lump Sum Allowance (LSA)’ and ‘Lump Sum and Death Benefit Allowance (LSDBA)’ wording. In […]