Advice to the FCA: Focus on Behaviour

As I have been reviewing the various policies that the FCA is contemplating with regards to DB transfer advice, a number of things have caught my attention

1)    The FCA clearly has a very strong opinion when it comes to execution of DB transfers; in a nutshell its position is that advisors should be starting from the viewpoint that a transfer is unsuitable and that, even with thorough investigation, in about 90% of the time, this will be the final outcome;

2)    The FCA, albeit through limiting sampling has been alarmed by

a.     The overall level of charges that have been applied, especially to very large transfer values

b.     The number of cases in which a transfer was recommended across the sample set, and the way some firms were recommending transfers across a wide range of disparate situations (implying perhaps house policy)

c.     The fact that DB to DC workplace transfer opportunities were mostly ignored, and that clients when given transfer advice were instructed to switch to vehicles that clearly would earn advisors ongoing fees, and create additional administrative costs

d.     The highly inconsistent method of fact find, analysis, means testing, and risk profiling that accompanied DB transfer investigation, esp. when clients were contemplating giving up cast iron income guarantees, and spousal benefits in return for higher NPV carrying with them income and protection uncertainties

I understand, given the above why the FCA has probably already decided that

1)    Contingency charge structures need to be eliminated so that advisors do not start to adopt behaviours that put their economic interests before the best retirement solutions for their customers

2)    More prospective customers need to be able to be able to acquire some level of retirement advice without having to pay an outrageous fee at the initial point of examination. At the same time, insistence clients need to be pay a reasonable fee for persistence

3)    Advisors need to be given more guidance and training in relation to the role of triage. Successful triage will, with the use of minimal guidance create much fewer cases, as well as an improved engagement process that is designed to provide a holistic approach toward retirement, and not just an analysis of the transfer itself.

I can’t argue with the sentiment here, although I do find it a bit harsh that the FCA hasn’t also highlighted in its appraisal of the situation

1)    That once the chancellor introduced pension freedom, the govt itself was inviting a conversation and dialogue that has led to far greater demand for transfer consideration;

2)    That there has been a lot of talk about lost/dormant pension pots, and about the desirability of pension consolidation;

3)    That the media, up until the British Steel debacle was painting a picture that more and more people were taking advantage of LTV conversions out of DB schemes, and that the market had plenty of room to grow (esp. given how annuity sales had fallen off a cliff). This view was supported by reported data itself released on a quarterly basis;

4)    That companies have remained under pressure to reduce their pension deficits, and thus beyond ALM opportunities have also been investigating how to entice older works, with large DB pension situations out of guaranteed schemes for themselves and their beneficiaries into different workplace or self-invested structures.

All of these developments have clearly been influential factors in their own rights, and thus should have alerted the level of vigilance that we are seeing now, perhaps to start much sooner.

Rather than shifting the blame to the FCA, I would rather ask them, as we enter the 3mth consultancy period to consider the following

1)    Is it time to start thinking about introducing advisory guidelines that consider client behavioural biases coming into the advice process, esp. to discuss both transfer and consolidation, as part of the initial assessment process; the EU when it went through its MIFID II consultancy review had the opportunity of including this alongside more factual assessments of knowledge and experience but chose not to do so.

2)    Shouldn’t clients, potentially considering an advisory firm, have the rights for greater levels of disclosure, not only in relation to perspective one off and ongoing charges, but also in the various functions that CF30, and paraplanners have been performing at the firm.

3)    How should compliance within advisory firms assess the behavioural suitability of their advisors. Should advisors, for example, who personally have biases that challenge long-term investment commitment, or are more cavalier in their relevant use of debt vs. savings, be providing advice on DB transfers or Equity release products to clients with low risk aversion and high confirmation bias

4)    Should it be the responsibility of advisors to ensure that for specific types of key life event decisions that prospective clients are given a certain level of guidance and access to self-awareness resources to reduce the risk of miscommunication. The FCA supported by the govt might want to provide funding for the creation of these resources, and their widespread distribution within the workplace.

I am highlighting these areas, and behavioural biases within these areas because

1)    I don’t think the regulators can continue to solely articulate solutions that focus on commercial restraint and operational process change (that also carries higher costs) without also thinking about the impact that different types of cognitive biases are clearly playing in relation to both the individual contemplating the transfer “as a here and now” event, and the advisor, influenced by considerations that introduce positive short and long term financial objectives;

2)    I don’t think that it is appropriate for the regulator to place the entirety of the responsibility for addressing what they see as a “decision” mistake entirely on the advisor community when others, such as companies, and individuals themselves may be pushing for the initiation of the conversation in the first place

3)    It seems clear that if advisors are going to continue to make the lion’s share of their income from advice on retirement and other types of long-term goals that they need to start becoming behavioural coaches in order to guide clients successfully to long-term objectives, esp. when all different forms of volatility (not just market) and regulatory change abound

The FCA is absolutely right to remain vigilant to conflicts that clearly threaten good customer accounts and invite into the market unscrupulous practices on unwitting clients; it should also realize that supporting programs that encourage bias discovery, and support behavioural coaching need to become an essential part of their thinking.