Lords claim RDR reforms will widen ‘advice gap’

Peers in the House of Lords have blamed forthcoming financial reforms for worsening an ‘advice gap’ that could leave the poorest stranded at retirement.

Originally posted on Citywire.co.uk by William Robins on Nov 28, 2012 at 11:08

Peers said in a debate last night that the retail distribution review (RDR) reforms, combined with high pension charges, would hurt savers with small pension pots.

The RDR reforms will abolish the payment of commission to financial advisers and require them to hold higher qualifications from the end of this year.

Cross-bench peer Sally Greengross, who led the debate, said the RDR would lead to those on a modest income being priced out of the advice market.

‘There is a big chance that [the poorest] are exactly the set of people who will receive no advice at all, as costs are made transparent and IFAs follow more high net worth clients,’ she said.

‘We must narrow the advice gap. Much more should be done to ensure consumer information is delivered but that must be from a consumer, rather than a compliance, perspective.’

She added that a fragmented government savings policy, split between the work of the Treasury, the Department for Work and Pensions and the FSA, was contributing towards the problem.

Tory peer John Patten added that it was possible for cost-effective investment and advice options to be made available to savers with small pots. ‘We could use the buying power that a million people would have to negotiate for good advice or a better deal when they invest,’ he said.

‘There may be market driven options. They have £2 billion to invest – the market could come up with a process to get a better deal for pensioners.’ Government whip Tina Stowell said the Department for Work and Pensions would consider his idea.

Patten also harshly criticised charges taken from pension pots. ‘These charges have just abolished any chance of getting these rates. People talk about the magic of compound interest but [there is a] tyranny of high charges.’

Labour peer Patricia Hollis added that self-interest among pension providers was also hurting the drive to create a savings culture.

‘I argued for small pots to be transferred to Nest [the National Employment Savings Trust] but this was batted away by the self-interested howls of the industry who would lose money under management,’ she said.  ‘In much the same way they have batted away any early access to a slice of pension savings that would also help transform savings culture.’

‘Many will be left with a portfolio of small pots which will be inaccessible to them at retirement. Those pots have gone AWOL, stolen by the structure of the pension industry we have helped to create.’

Labour peer Lord Lipsey added that the Financial Services Authority had failed to engage politicians in its efforts to reform financial services with the RDR.

‘I did not get a briefing from the FSA – this is extremely neglectful. It’s the FSA’s RDR that’s created the advice gap. Surely those here have a right to hear from the FSA. I don’t know whether this is FSA incompetence or FSA contempt of Parliament.’

Lipsey, who is the president of the Society of Later Life Advisers, said it would be wrong to assume advisers would not write unprofitable business at retirement as ‘winning the trust’ of a pensioner could mean getting other work, such as on inheritance tax issues, later on.

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Never Trust an IFA?

‘Never trust an IFA, they are commission-grabbing ******s.’

By Mike Deverell – Posted from  www.citywire.co.uk

This is a typical comment on Citywire’s forums – often underneath one of my articles – and seems fairly representative of the average Citywire reader’s opinion of Frankly, many of those in the industry have only themselves to blame for this shoddy reputation. Although I have come across many fantastically professional, diligent and honest individuals during my career, I have also met my fair share of salesmen only interested in earning the maximum commission.

Despite this, I believe financial advice is severely undervalued in this country. The value it can add, both in pound-note terms and in terms of comfort and confidence, is seriously underestimated.

I normally write about investment matters, but I thought it was time I set the record straight about our industry, the sharp practices to look out for, the changes that are afoot, and the value that good-quality financial advice can add.

It’s all about incentives

As anyone who’s ever read Freakonomics can tell you, people respond to incentives whether consciously or unconsciously.

Commission is an incentive that misaligns the interests of the client with that of the adviser (salesman). A commission-based adviser’s objective is to sell a financial product since he or she will not be paid otherwise. This product may well meet the client’s objectives, but it may not. The commission incentive ensures that client and adviser have a different objective.

If paying by fee, the adviser gets paid whether or not a product is sold. A fee-based adviser is much more likely to recommend a client keeps their money in cash, or uses it to pay off a mortgage, for example.

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Mis-selling scandals

Commission has been a major component of almost every mis-selling scandal, whether it involves IFAs or not. For example, the Financial Services Authority (FSA) recently expressed concerns about how poorly constructed incentive schemes caused mis-selling of payment protection insurance (PPI) at banks.

Luckily, commission is about to be banned under the retail distribution review (RDR). This comes into play from the beginning of 2013, and will go a long way to cleaning up our industry.

However, an inappropriate fee structure can also wrongly incentivise advisers or discretionary managers. For example, a typical trick by many wealth managers is to charge a relatively small annual management charge, but also charge, say, £25 for each trade.

This gives firms an incentive to trade, which might not necessarily be in the clients’ best interests. At Equilibrium we worked out that a single switch (which remember is actually two transactions – a sale and a purchase) for all our clients could earn us £200,000 if we charged £25 per trade! That is an incentive we do not want to have.

Even after RDR you will need to think carefully about whether the fee structure being proposed offers an inappropriate incentive.

The value of advice

Although it is important to be aware of the potential for sharp (or just poor) practices, professional financial advice can be invaluable.

Financial advice covers a wide range of areas, but quality advice can, among many things:

  • Reduce the amount of tax you pay, whether that be on income or gains from investments.
  • Help protect your family against the unknown with appropriate insurance.
  • Help you plan for the future, knowing how much you need to save for retirement and work out when you can afford to retire.
  • Reduce inheritance tax on your estate.
  • Build appropriate investment portfolios to match your risk tolerance and objectives.

Most Citywire readers have as much chance of selecting decent investment funds as the average IFA. Unfortunately, selecting a good fund manager is a fairly minuscule piece of the investment jigsaw, with asset allocation accounting for more than 90% of the variance of investment returns. Quality investment advisers therefore focus on asset selection rather than fund selection.

Do advisers avoid investment trusts?

One myth that I consistently see repeated on Citywire forums is that advisers only recommend investing in unit trusts or open-ended investment companies (Oeics) instead of investment trusts. They do so – so the story goes – because they get paid trail commission.

Quality advisers who use wrap platforms rebate trail commission back to their clients. They also get a discount on annual management charges, which makes unit trusts similar in cost to investment trusts, often cheaper. We find that the discounts we can obtain on funds often pay for a large part of our fees.

After RDR, trail commission will be banned, and to call themselves independent, advisers will have to consider investment trusts, exchange-traded funds (ETFs) and a much broader spectrum of products as well as unit trusts.

Some may decide they haven’t the time or resources to review all the relevant types of investment. These advisers will no longer be allowed to call themselves ‘independent’, but rather they will offer ‘restricted’ advice.

Qualifications

The RDR also means advisers must now achieve a much higher level of qualification before being allowed to give advice. The previous benchmark for financial advisers was the Certificate in Financial Planning. This was a level-three qualification. From next year, all advisers must be qualified to level four as a minimum. All advisers will also have to sign up to a code of ethics and be a member of a professional body.

To be sure of professionalism, look for chartered financial planners who have qualifications equivalent to degree level. Chartered financial planners must also have a certain amount of experience and carry out a set amount of learning each year to maintain their chartered status. The same can be said for certified financial planners, although their qualification is equivalent to the first year of an undergraduate degree course.

Frankly, most quality financial advisers can’t wait for these new rules to come into play since this will force the unscrupulous and the unprofessional to either clean up their acts or go out of business.

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Do you know about the UK pension shake-up?

Do you know about the UK pension shake-up?
Auto-enrolment is one of the biggest pensions changes in decades, but most employees are still in the dark about how they will be affected

More than half of UK workers are in the dark about the huge changes to the pension system that will see them automatically enrolled into their employer’s pension scheme from October.

The Workplace Pensions Report 2012 by insurer Scottish Widows shows 52%, or 9.9 million, workers in the UK are unaware of auto-enrolment.

Under the government’s new plans, workers who do not already contribute to a workplace pension will be auto-enrolled into one – workers in larger companies will be auto-enrolled from October, with those in smaller companies will be auto-enrolled over the next five years.

However, it is not a compulsory scheme, and workers will have the opportunity to opt out. Employees will continue to be auto-enrolled every three years and must continue to opt out.

Lynn Graves, head of business development for corporate pensions at Scottish Widows, said it was ‘shocking’ that with just three weeks to go until auto-enrolment starts there was still a gap in awareness.

‘Auto-enrolment is designed for people who traditionally don’t have access to a workplace pensions scheme, such as smaller employers of those with lower incomes, and it is clear that information is still not reaching the audience it is intended to target,’ she said.
Wanting to save more

Although many employees are unaware of the changes that make it easier for them to save, many wish to do so.

Just 11% of workers said they would opt out of the scheme, with 32% of those who would not take part stating that they could not afford to save.

However, those who are willing to save want to save a lot more. The amount that workers want to save has doubled since last year, from £37.50 to £76.95, although a third of people still said this level of saving would not be enough to provide them with an acceptable standard of living in retirement.

Graves said: ‘It is clear from our research that people are failing to save enough for their future, especially in relation to retirement.

‘While it is a positive sign that people are willing to pay more into their workplace pension, substantial work must still be done to encourage people to save enough for retirement and this is a challenge for government, the pensions industry and employers.’

She added that Britain was ‘slowly waking up to the reality of how we are going to be able to fund our retirement?’, with people realising they will not be able to rely on the state to provide the majority of their income.

In fact, just 2% of employees surveyed felt the state pension would provide sufficient income.
Achieving pension targets

A total of 70% of employees surveyed said they wanted to retire at age 65, and 48% want to have an income in retirement of between £15,000 and £30,000.

Individuals intend to use a number of sources to fund this income, with company pensions the number-one source of income – 33% of people said their company pension would help ensure they had a comfortable retirement.

The state pension will play role in 40% of people’s retirement plans, and personal pensions will make up part of the retirement income for 32% of people.

Although the state pension was the most popular choice as a funding source for retirement income, individuals are realising they have to take more responsibility for their old age.

When asked whether individuals will have to take more personal responsibility for their financial security in retirement, 32% strongly agreed and 42% somewhat agreed.
How to increase savings

Employers can play an important role in their employees’ savings habits, with many of those surveyed keen to access different financial products through their employer.

A total of 39% said they would like to save into an employer pension, 17% said they would like their workplace to offer a cash ISA, 15% wanted to obtain mortgages through their employer, and 14% would like access to loans.

Jim Bligh, head of labour market and pensions policy at the Confederation of British Industry, said employers needed to review their offerings to employees.

‘All these changes in the pensions landscape offer an opportunity for employers to look at their wider reward package. Employers need to ensure that they are fine-tuning their reward package to the needs and demands of their employees, so they are able to recruit and retain the best talent available,’ he said.

‘With personal incomes under pressure, we are seeing a greater appetite for a mixture of long-term and short-term saving options being available to employees.’

Written by Michelle McGagh, Sep 10, 2012 at 00:01 posted on http://www.citywire.co.uk, follow the link below to read more;

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Pension Scams you should know about.

Spending time with loved ones

retirement shouldn’t mean money worries

‘It’s been an area that is ripe pickings for fraud,’ said Jane de Lozey, joint head of fraud at the SFO. ‘Pensions are complex and have a mystery to them. People don’t understand them and this leaves them open to abuse.’
GP Noble: ‘smash and grab’ fraud

De Lozey knows all about pension fraud as she worked on the GP Noble case – one of the most high-profile pension fraud cases in recent history. The case started four years ago, and has so far spawned three criminal trials and one civil trial, with another trial due for October. So far £30 million has been recovered from the £52 million GP Noble fraud.

Of the GP Noble fraud, de Lozey said: ‘It was eye-opening to see how easy it is to commit pensions fraud. GP Noble was a smash and grab fraud, the equivalent of ramming into an ATM machine – it showed how easily you can steal other people’s money.

‘The GP Noble fraud is straightforward compared to what we are seeing now. Fraud has been elevated now in terms of complexity.’
New taskforce

It is because of this increased complexity that the SFO is helping to set up a pensions fraud taskforce, working alongside the Department for Work and Pensions, HM Revenue & Customers, the Economic Crime Council, the Department of Business Innovation and Skills, the National Crime Agency, The Pensions Regulator and the Financial Services Authority (FSA).

‘The joint taskforce will specifically target pensions, because we have seen an increase in the number of fraud cases with a pensions angle, and the self-invested personal pension (Sipp) angle has increased a lot in the last year,’ de Lozey said.
Suspect investments

As Sipp savers have control over what they can invest their money in, the fraud often centres on investment. People are encouraged to invest their pension schemes in high-risk investments, many of which promise returns they cannot deliver.

The SFO has seen an increase in overseas property development fraud, with savers encouraged to invest in everything from hotels to golf courses and student accommodation.

Bio-fuel and sustainable energy investments are also being marketed at Sipp investors as a reliable investment for their pension pot.

‘Some of these investment are offering 16% returns – this should set the alarm bells ringing. Also, anything that says income is guaranteed,’ said de Lozey. ‘We see claims that money is guaranteed because it is held in escrow accounts. It is our experience that these claims do not stand up.

‘If something is too good to be true, then that is usually the case.’
Unregulated investments

Many of the investments being pushed to pension savers are unregulated collective investments (Ucis), which are not FSA regulated and are not covered by the Financial Services Compensation Scheme should something go wrong.

Ucis are often based in foreign countries away from the prying eyes of regulators, and de Lozey has straightforward advice: ‘Some jurisdictions are unstable. You have to ask yourself whether you would buy a holiday home there and if not, why would you invest in a rainforest development there? It could be a very costly mistake.’
Unlock at your peril

Pension unlocking, or ‘liberation’, is an area attracting fraudsters. They allow savers to access their pension fund early for a large fee, but fail to explain the tax penalty savers will be hit with in retirement.

‘People are unaware of the [tax] rules. Quite often people who are in financial hardship are targeted [by pension unlocking scams]. They think, “it’s my money so why can’t I have it?” and they are working with an adviser who they think is acting in their best interest, but then they are hit by a tax whammy,’ de Lozey said.

‘People are paying a huge upfront fee [to the pension unlocking company], and then when they get to retirement they take another hit.’

De Lozey has been targeted by pensions unlocking companies through unsolicited texts, and warns people to stay clear of companies that cold call.

She recalled one independent financial adviser who was cold called. He did not tell the company he worked in finance, and they told him if he did not unlock his pension now he would end up owing the pension company money in retirement – a situation that could never happen.

‘The scams we are seeing are highly organised, run by professional people with credibility who have worked in finance and have good contacts. Some of these people are very clever – they may be selling things that sail close to the wind and target unsophisticated investors,’ she said.
Later-life victim

One of the problems with pension fraud is that people are often unaware they are the victim of a scam until they come to retire years down the line, when the fraudsters are long gone.

‘We suspect there are many pension fraud schemes, and many people will be unaware they are victims of crime. They will not know they are victims until 15 years down the line when they try to drawdown their pension and realise their fund has been dissipated,’ de Lozey said.

She added that often victims of fraud feel guilt and embarrassment.
Trust your instincts

The people running pension scams are sophisticated and persuasive, de Lozey warned. Many have a background in financial services and know the jargon.

‘Because pensions are complicated, because there is lots of mystery and jargon, we hand over control and we hand over our money,’ she said. The best advice de Lozey has is to ‘trust your gut’, and if something seems too good to be true then it probably is.

‘Do not be fooled by the suits and flash cars. Do not think of this person as a professional, but as an ordinary person and ask yourself: do you trust them? If we listen to our gut then our instincts do not let us down.’

If you believe you have been targeted by a pension scam contact, Action Fraud.