Contingent charging is controversial. Should advisers consider another approach?
- The majority of advisers still use contingent charging, but does it fit with a new post-RDR world?
- Contingent charging cannot escape the whiff of bias, which is particularly problematic in the case of pension transfers
- But for some clients, the choice is contingent charging, or not receiving advice
Contingent charging is an uncomfortable subject for advisers. The FCA permits it, the majority of advisers use it in some capacity, but in the new post-RDR world if feels like it’s ‘against the spirit of the game’. Should advisers be thinking of ditching their contingent charging arrangements?
The most controversial area for contingent charging is in defined benefit transfers. Here, the sums are large and the stakes high. Equally, advisers must contend with a difficult history of pensions mis-selling, which blighted the industry’s reputation for decades.
Some advisers are clear that contingent charging has no place in a modern advice business. They point out that clients who don’t transfer are being subsidised by those who do. One commented that if an adviser is doing a pension report for free, it is effectively a sales aid, rather than a piece of independent advice.
It is difficult to avoid the whiff of bias. If recommending a pension transfer makes thousands of pounds, and not recommending makes nothing, it would be a tough-minded person who would always err on the side of not transferring.
But, say some, many clients can’t afford to pay for the advice up front. The costs needs to be paid for from the pension fund or they won’t receive any advice on what is, after all, one of the most important financial decisions they will ever make. The point out that plenty of ‘professional’ business is done on this basis – conveyancers, for example, often don’t charge for house sales that fall through.
Most, however, do not expect the regulator to intervene except where there are obvious cases of bias. For the time being, the regulator’s position is simply that those charging on a contingent basis need to consider conflicts of interest and ensure there are ‘appropriate controls’ in place.
So, for now, contingent charging can stay, as long as it is appropriately managed. One final consideration for advisers, however, might be that those who have moved to non-contingent charging report that it has generally gone down well with clients. It removes a certain tension in the relationship. Of course, it is also not an all or nothing choice – it is possible to trial a different approach with certain clients where appropriate.