We’ve been involved with a number of firms who are on the acquisition trail and as part of the due diligence work we support them with, we check a lot of advice files. It won’t come as a surprise that many of these involve replacement business.

What never ceases to amaze us is that, despite all the past commentary and firms getting into trouble because of poor advice on replacement business (DB transfers are technically replacement business), we continue to see a lot of issues. For example, cost comparisons that don’t include ALL costs, generic client objectives, all the advantages of the new solution but none of the downsides, etc., etc., but one in particular seems to be a common feature – advisers’ inability to evidence that the ceding arrangement(s) is/are no longer appropriate.

Even before RDR, but more prevalent since, firms have decided to adopt their own strategies and have developed bespoke investment solutions that they have (very) actively recommended to clients. More recently there has been a shift away from advisory portfolios to wider use of model portfolios and as a result there has been a flurry of activity in recommending these new arrangements to clients.

This is all well and good, provided of course that it translates into tangible benefits for the client. But this is only part of the story. Before this can happen the adviser must be able to evidence that:

• the ceding arrangement is no longer suitable for the client’s needs and objectives, and;
• the new solution is superior.

Just because the new arrangement is cheaper, it doesn’t necessarily mean that it’s better than the old one. Cost is only part of the consideration.

When switching existing arrangements into firms’ shiny new propositions, quite often it’s contracts that firms frequently describe as ‘older-style’ arrangements that are being moved.

What do you mean, older-style arrangements?

These are frequently DC pensions, but ISAs/GIAs and sometimes investment bonds too, that were set up some years ago with mainstream product providers – you know the ones – and platforms.

The trouble is, whilst some of the newer plans/contracts/platforms may offer access to a wider range of features, many of the older arrangements still meet client needs and objectives.

What we see on files

• PP switches where the adviser states that the existing contract doesn’t offer access to flexible retirement options such as flexi-access drawdown. But the client is years away from needing to access benefits.
• Transfers/switches where the old arrangement has ‘a limited fund range’. And the firm recommends a switch into one fund, or fails to demonstrate why the limited fund range is an issue.
• Transfers/switches where the existing fund doesn’t match the client’s attitude to risk, but an internal fund switch is completely overlooked.
• Existing funds are underperforming. But there is no discrete comparison or evidence to support the assertion. In any case, it is risky to switch to access ‘better performance’ as there is no certainty that can be delivered.
• A move to a new arrangement because the old one doesn’t have risk rated/targeted funds. Yet the file isn’t able to articulate what actual benefits these provide.
• The old contract doesn’t provide access to our CIP/preferred funds. So what? That does not mean that the existing arrangement is not perfectly adequate as it is.
• The client wants a ‘smoothed’ return. Of course, it was the client who stated this wasn’t it?
• The client wants discretionary fund management. Really? Why?
• The client’s workplace pension won’t facilitate adviser charging so we can’t advise unless they transfer. Of course you can advise. You just need to agree some alternative fee option?
• The old contract is expensive. But when initial and ongoing advice charges enter the equation the total cost of the new arrangement is far higher.
• Cost comparisons exclude advice charges. The comparison must take account of ALL charges.
• The costs of with profits funds are high and opaque, so we need to move to a cheaper alternative. But the with profits fund meets client risk outlook. And there are specific rule requirements around recommending a switch or encashment of a with profits arrangement.

This isn’t an exhaustive list, but it’s probably a fair bet that some of the above will appear within the FCA’s findings from the files it is reviewing in its thematic review on Retirement Income Advice. And how many paraplanners out there are presented with fact finds containing statements like this, yet they’re expected to be able to produce a compliant file and report?

Without adequate KYC and rationale it’s very difficult to evidence suitability based on these reasons alone. This is basic stuff really but firms routinely overlook the requirements of COBS 9.2 which state that a firm must obtain sufficient KYC to be able to evidence suitability and that if it doesn’t the firm shouldn’t make a personal recommendation at all.

And when it comes to suitability reports COBS 9.4.7R confirms that they must:

1. specify, on the basis of the information obtained from the client, the client’s demands and needs;
2. explain why the firm has concluded that the recommended transaction is suitable for the client having regard to the information provided by the client;
3. explain any possible disadvantages of transaction for the client.

So a waffly report that doesn’t clearly articulate the client’s objectives, can’t explain why the recommendations are suitable and doesn’t highlight the disadvantages, simply will not cut the mustard.

As most new business is replacement business these days, if you can’t demonstrate that the old contract isn’t suitable you may have a problem proving that the new one is, so getting the basics right is a good start.