Advisers charging “excessive” fees for attractive defined benefit (DB) transfer values face a conflict of interest that could one day result in a misselling scandal, one concerned adviser has warned.
Affluent Financial Planning director Carl Melvin said he had received enquiries from individuals looking for a second opinion on advice given to them from other advisers regarding sizable DB transfer value fees.
In one instance, he said, an individual working for an international car manufacturing firm had approached him after their adviser suggested they opt out of their final salary scheme and take a £400,000 transfer.
The individual had been told the money would be invested elsewhere and make handsome returns – and that they would be charged a fee of £17,000 for the adviser to undertake the transfer.
Pointing out that equated to 4.25% of the total value of the transfer, Melvin said: “I’m concerned about a misselling scandal in the future. A combination of high transfer values and big fees for the adviser is creating a conflict of interest in terms of doing what’s best for the client.
“When large sums of money are involved in the fees, it might influence the advice being offered. There may be potential issues later, with advisers found to have given bad advice and made a huge fee – and then we’ll have to pick up the pieces.”
What is ‘excessive’?While Melvin described a 4.25% charge as “excessive”, he agreed it was appropriate to charge “a lot of money” due to the complexity of the work involved.
Furthermore, as Technology and Technical managing director Kim North pointed out recently in a column for Professional Adviser, many financial advisers are disinclined to offer DB transfer services “as a consequence of the compliance risk and expensive PI insurance”.
Melvin continued: “The issue is – when does that fee become excessive? Are you selling advice or are you selling the transfer? Are you cutting corners because you see a big fee on the horizon?”
As a general rule, Melvin felt a fee of between 1% and 2% was reasonable, and anything above 3% was “pretty excessive”.
Dentons director of technical Martin Tilley described a 4.25% fee on a £400,000 transfer value as “an awful lot of money” and said the individual was “probably right” to seek a second opinion.
He also suggested that, due to the variation of transfer values, a sensible approach was to avoid charging a fixed percentage.
“Charges can vary enormously,” said Tilley. “If you have a £100,000 transfer, I would say a 3% charge is not unreasonable at all. Having said that, if you have something like a £500,000 transfer, then it’s down in the range of 1% to 2%.”
He continued: “It’s the wrong thing to do – to say we charge a percentage of the value. However, I really don’t believe anybody can do this job for under £3,000 because there is an awful lot of detail that has to be gone into.
“There is also a little bit of cost related to the size of the transfer because, the bigger the transfer, the bigger the liability, so there is some kind of premium.”
According to Xafinity, the number of DB pension transfers ‘skyrocketed’ in the first quarter of 2017, with the company’s research recording a 166% increase year on year.
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