Making suitable recommendations

"How do advisers help individuals who may be better off transferring their DB pension to get the advice they require that would recommend that they should transfer?"

Some commentators believe this is a softening of approach by the FCA. I disagree. I believe it is raising the bar as to the quality of financial advice required. We are likely to see the expectations repeated elsewhere in the financial advice market.

If the supposition is that a transfer is not in the client’s interest all that was needed was evidence to the contrary that it was, for the existing guidance requirement to be satisfied. If a personal recommendation for someone approaching retirement is required, a full understanding of the customer’s situation has to be ascertained to ensure that recommendation is suitable.

This understanding would include sources of income for themselves and their partners; their health; and what their essential and other regular spending includes. What are their objectives? What other assets do they have? Their plans for bequests; will there be large one-off expenditure, and how will that be funded?

To this list we need to add the appropriateness of the benefits of the DB scheme. Is the pension payable from a fixed age with no option to defer? Is the income it produces greater than that which is required? Are they income rich and asset poor? Do they expect to remain in their current home? Will they be downsizing in which case how do they intend to use the proceeds?

Some of these issues could, on their own, be a reason to consider a transfer. Others could be the reason why not to recommend a transfer. All this needs to be discussed before attitudes to risk, capacity for loss and the necessary maths can be considered. Only then can a full recommendation that is suitable be made.

This raising of the bar should prevent transfers that are not in the client’s interests from proceeding. However, on the other hand, how do advisers help individuals who may be better off transferring their DB pension to get the advice they require that would recommend that they should transfer? Thorough personal advice as described above will not come cheap.

Dealing with someone approaching retirement will be easier than someone much younger. Look at the list above - how do you make a recommendation that a transfer is suitable? You are making a comparison with a guaranteed income payable many years into the future. If you do not know what the circumstances of the individual will be when that income becomes payable how do you know whether it will be crucial to their retirement well-being or not? Much could change between when the advice to transfer is made and when the income would have come into payment.

Advisers that deal with DB transfers will need the soft skills that will extract all the information that will be required and ‘play back’ to the customer what they are saying. This ‘playing back’ is important for it is not the weight the adviser puts on the information provided. It is the weighting to the customer.

For example, they may have a parent that has recently gone into care and their culture/understanding/moral compass is such they feel they must pay for that care. This means that they require upfront income of more than their DB pension will pay. It will be easy to jump to the conclusion that care will be paid for from the parent’s own resources. One piece of essential information that is not obtained and properly understood, from the client’s point of view, could be costly.

But will the FCA stop at DB pension transfers with such requirements? The Council for Mortgage Lenders have published a report on later life borrowing entitled, ‘New Mindsets; Old Silos’. This looks at the different approaches to later life borrowing taken by mortgage and equity release advisers. As the report looks at older mortgage customers, it does not consider whether the client should consider downsizing and investing the proceeds, or even releasing larger sums from their pensions over a period of time.

Unless a full understanding of the client is undertaken, a recommendation to the client as to what for them is the most suitable course of action cannot be made.

Because of their complexity, DB Pension Transfers are an easy starting point for the requirement to make a suitable recommendation. However there are many other advice situations where the most suitable recommendation could be to do something different or completely outside the remit of the adviser. We might now wonder whether the pension transfer consultation paper is the start of a move in that direction.