DB transfers must be a collaborative process between advisers and clients so, says Mike Morrison, it is tough to see how creating a distinction between the latter’s ‘needs’ and ‘objectives’ will help
In the past, I have been known to be overly precise with words and their meanings – though admittedly, while to me it is precision, others might see it as pedantry. I thought of this again while looking at the FCA consultation paper – CP17/16: Advising on Pension Transfers – and, in particular, the following paragraphs:
“While a client’s objectives may be the reason they have sought advice, the client’s needs should influence the advice process. Firms should challenge the realism of a client’s objectives, where appropriate including any objectives which do not immediately appear to be rational or factually correct.
“A recommendation is unlikely to be suitable if it meets the client’s objectives but not their needs. The analysis should therefore include sufficient information for advisers to understand and explain how prioritising any of the client’s objectives may result in trade-offs – for example, if the client is prioritising death benefits, then any adverse impact of this on potential income should be illustrated.”
My problem with this was the distinction between a need and an objective – a quick dip into the dictionary gave me the following:
* A ‘need’ is a thing that is wanted or required.
* An ‘objective’ is a thing aimed at or sought; a goal.
If a potential transferor indicates they want to access some cash to assist in a business venture and they do not care about the guaranteed income, is this a need or an objective? Call me pedantic if you like but, in my view, there is very little between the two – at a push, ‘need’ has a bit of the ‘imperative’ and ‘objective’ probably is a bit of a ‘nice to have’.
My concern is selling this to clients who might not be aware of the subtle difference – and even the possibility of advisers interpreting the terms differently and therefore not advising a transfer.
I have mentioned before that, at the heart of many defined benefit (DB) transfer value discussions, there appears to be a dysfunctional consumer transaction. On one side there is a consumer who has to take advice they do not not want, at a price they feel is excessive, with the chance the end result is not to do what they have paid for (while still having to pay). On the other, there is the adviser who is cautious about retrospective regulatory action, charges accordingly and who, in many cases, does not need to transact the business.
Now there has always been the possibility of difference in interpretation but, in my view, this guidance could make it worse – perhaps encouraging clients to seek an adviser they believe will give the right answers to avoid a situation where the client’s objectives become superseded by the adviser’s objectives.
Collaborative process
Surely the DB transfer process must be a collaborative process between advisers and clients, which sees them working together and trusting each other.
Explaining the implications of a DB transfer to a client is the starting point – explaining the implications and the client understanding these implications and acting accordingly must be the desired outcome. I am not sure the creation of doubt between what is a ‘need’ or an ‘objective’ assists in this decision-making process.
The introduction of the pension freedom legislation has encouraged many people to view their pension fund in a different way and created even more of an objection to having to buy a guaranteed income. Many people with DB pensions want that same opportunity but have to pay for advice that starts from the perspective that a guaranteed income is the solution.
It is a great opportunity to bring financial advice into the mainstream but we must start from the side of the client.
Mike Morrison is head of platform technical at AJ Bell
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