Clients' 'needs' and 'objectives' need an objective definition

DB transfers remain in high demand and the current process presents a number of dilemmas for financial advisers.

I am not sure that the FCA Consultation Paper on Advising on Pension Transfers (CP17/16) really assists in clarification and indeed in my view makes the whole transaction even more complex.

Let’s start from the assumption that the adviser’s normal procedure is to do the information gathering for the TVAS, produce the TVAS report and then arrange a meeting to talk his findings through with the client and provide a recommendation.

However, it soon becomes clear that the first challenge can be distinguishing between a client’s needs and objectives. The FCA explanation of this is:

“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.”

Now call me pedantic but in my view there is very little between the two. ‘Need’ has a bit of the ‘imperative’ and ‘objective’ is probably a bit of a ‘nice to have’. A quick dip into the dictionary gave me the following:

  • A “need” is something that is wanted or required
  • An “objective” is something that is aimed at or sought

Still not a lot in it and the real dilemma for advisers is explaining this to clients who are very unlikely to be aware of the subtlety of the difference.

If a potential transferor indicates that 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?

Alternatively, the outcome may be clear to the adviser but goes against the initial wishes of the client, potentially leading to insistent client territory.

For example, a client may wish to provide for children after death, even if this is at the expense of their income. Clearly an objective, rather than a need.

However, the fact find may establish that the client has little other pension savings and a number of spending commitments, such as an outstanding mortgage. A cashflow analysis would then establish that they are more reliant on the guaranteed pension income than they first thought. A clear need, which according to the FCA guidance, trumps the initial objective.

So the advice in this case is likely to be not to transfer and the adviser will need to explain the difference between the need they have identified and why this is more important than the client’s objective.

A second challenge can arise in these cases where the adviser may charge on a time-cost basis comprising an initial charge for providing the recommendation and an implementation charge where the advice is to transfer and the adviser processes it on behalf of the client.

There is a fundamental mismatch here. The adviser can provide advice to the client who would have to pay, even if the advice is not what they want.

The end of the FCA paper says:

“The clarity provided by this consultation should better equip advisers to give the right advice. This will help consumers make well informed decisions which consider all relevant factors to allow them to decide whether or not to transfer. It will also give consumers confidence in the advice that is being provided, whether or not this results in a positive recommendation to transfer.”

Will consumers who have potentially just paid several thousand pounds to be told that they cannot move their own money (which they could if it was in a DC scheme) really be feeling confident?

There has always been the possibility of difference in interpretation and I am not sure that the attempted differentiation between what is a “need” or an “objective” assists in this decision making process.

The introduction of pension freedoms has encouraged many people to view their pension fund in a different way and has 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, with that advice starting from the perspective that a guaranteed income is the solution.

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.

Head of Platform Technical

Mike Morrison has worked in financial services for far too many years. In 1990 he joined Winterthur (now AXAWealth) as Technical Manager, playing an instrumental role in the development of their SIPP product and later their pioneering work on income drawdown.

Mike is an ex Chairman of AMPS (the Association of Member Directed Pension Schemes) and is on the Financial Planning Committee of the ICAEW. He is also an Associate of the Pensions Management Institute and the Chartered Insurance Institute, and he holds both an LLB and an LLM in European Law.

An accomplished speaker and writer on financial services matters, Mike is passionate about retirement and savings issues, and how we can better communicate these to a wider audience.