AC/DC to power the new retirement?

Despite some pretty good tunes over the years, I’m not suggesting that the band, AC/DC, are the key to solving the retirement advice gap. However, AC/DC, referring to Adviser Charging and Defined Contribution respectively, might just be a major component in the solution.

I talked about the retirement advice gap previously. In summary, I think we all agree that, while the guidance guarantee will be valuable, it won’t give people all the answers they need. And full financial advice will be disproportionately expensive for many people whose pot size doesn’t merit it.

So, if someone at 60 has, say, £30,000, and rather than wanting to buy a sports car or blow it all on a year of extravagance, they want to do something sensible with it to bridge the gap to State Pension, what kind of advice can they get? Let’s say an adviser can give some narrow (I deliberately use this word to avoid any of the recognised advice terminology) advice relating purely to how they might structure their retirement products. And they can do that for, say, £400, then it might be attractive.

Such a statement will bring challenge, of course, from those who believe there isn’t a workable framework for advisers at this cost, or it simply can’t be delivered at this cost, or indeed that there is simply no appetite from people to pay £400. So let’s look at these in turn:

There’s no framework

I agree there are significant complications still inherent within the ‘simplified advice’ regime and that there are many who say it’s impossible to restrict advice to retirement products because there are so many other things to consider. I accept that, but some people may only have a finite financial resource to work with, or will simply accept that their retirement fund is there purely to deal with their retirement needs. And I also sense that the regulator is up for finding a solution to this problem, so they’ll listen to ideas about how it might be delivered without an impending fear of recrimination.

It can’t be delivered for £400

This can’t be true, as some are already doing it. Whether it’s with an off-the-shelf, limited service or simply online, there are examples of both. It may not be as profitable as dealing with wealthier clients, I accept that, but the volume may make up for the reduced margin.

There’s no appetite from customers to pay £400

I know all the research says few people will pay even smaller amounts than this – never mind £400 – but we are entering a new world where people can make decisions with even a £30,000 pension fund that will cost them thousands of pounds in tax, if not executed well. Just look at some of the differences in tax treatment between the new FADs and UFPLSs to see that.

And it’s in relation to this third point that we can consider AC in a DC environment. People may be more willing to pay when they are offered the option of deducting payment from their fund, rather than handing over a cheque. Many people will happily pay this amount or more, every couple of years, when they change their mortgage and agree to wrap the fees into the loan.

I think AC has very limited application at the point of auto-enrolment which is, after all, designed to have people start saving without any intervention required. But it would seem like a much more obvious method of advisers being paid at the point of a customer’s retirement.

There’s nothing new in what I’m suggesting, and I never suggest I know better than advisers how to deal with such challenges, but I don’t hear many people talking about this ‘mid-market’ with a solution in mind.

So I predict AC/DC will be popular amongst people at retirement. That’s good, because Brian Johnson has confirmed they have no intention of retiring any time soon.


14 thoughts on “AC/DC to power the new retirement?

  • Hi Jamie
    I agree with some of your points, but £400 is way too low.
    Typical charge out rate for an adviser should be around £200 per hour, paraplanner £130, administrator £75.
    In your example, I woudld think that you have the following activities, resulting in the following costs:
    Iniital engagement with client (0.5 hours at £200) £100
    Research into existing pension (1 hour at £75, 0.25 hours at £130) £107.50
    Factfinding meeting with client (0.75 hours at £200) £150
    Analysis of course of action recommended (0.5 hours at £200) £100
    Product research (0.5 hours at £130) £65
    Recommendation letter (0.75 hours at £200, 2.5 hours at £130) £472.50
    New business processing (0.25 hours at £200, 1 hour at £75) £125

    So we have a cost of £967. Round it up to £1,000.

    I have deliberately tried to keep the amount of time to a minimum – for example the factfind meeting is short, and there is no second meeting. I’ve also assumed that there are no other issues to consider (e.g. defined benefit pensions, some sort of guarantee), which is unusual and that the client is happy with advice on just one type of product (which would be a bit weird “no, please dont help me plan my retirement!”)

    Some people may be doing this for £400, but if they are, they are doing it at a loss (remember when Standard Life used to do pensions at a loss?)

    You could reduce the cost by increasing the number of advisers, paraplanners and admin staff, thus increasing competition and lowering rates of pay, or by simplifying pensions so that the choice and complexity were removed. Until that happens, it’s £1000 a pop, I’m afraid.

  • Philip,

    Thanks for your comment. It’s clearly well informed and I won’t argue with your numbers.

    I guess that then leaves the question as to what can be done for a smaller fee? Or alternatively, can we move people to a position where they accept the true cost of receiving valuable advice? That is, those who don’t already.

    Feels too important not to try and work through.


  • The part of the process that looks expensive is the reasons why letter. It’s also the part that adds the least value. There are too many reasons why the letter is written – obviously, to explain to the client, but also it’s there to protect the adviser against the compliance consultant, the regulator and the Ombudsman, as is the documented research that accompanies it (I find it is the documentation of the research which takes the time, not the research itself).

    If the costs are to be reduced to less than £500, then the regulator and the Ombudsman need to play their part, trusting professionals in a different way (they may have to innovate, as I’m not convinced that many advisers would take the FCA and FoS at their word).

    I wonder if pension providers might also play their part in reducing cost, and perhaps the regulator could help here. Pension companies are often reluctant to disclose the details of guarantees on their contract (I’m afraid Standard Life is guilty of this) and they make it difficult to find out basic information like fund choices, charges etc. If the regulator were to work with advisers, it could prescribe what information would need to be provided in these situations, and this could cut down the time spent researching the existing product.

  • HI Phil,

    Without being too contentious I find your figures astonishing.

    Just one point which absolutely baffles me and that is the charge of £472.50 to write a letter which presumably will look a lot like many similar letters written by your business.

    My impression is that no account of your embedded reusable knowledge or skills is included and every case is treated as though you have no experience or knowledge of the relevant market being dealt with.

    All seems awfully reminiscent of the process used by most lawyers in padding out hourly charged work to account for their almost universal refusal to adopt money and labour saving technology.

    This pensions market is being enabled for us and bears no resemblance to the public’s need to use lawyers and accountants for work which is directed to them by statute.

    Perhaps this is why many are looking at this huge market as a risk rather than as an opportunity ?

    • Hi Phil,

      Imagine that you meet a client who has £30,000 in a personal pension and your advice is that they take their maximum tax free cash and buy an annuity.
      You are going to have to tell them, in terms relevant to them
      1. Why they should draw their benefits now (pretty much no chance that they will simply stop work on one day nowadays, and the chances of that day coinciding with the selected retirement date on their pension and the date they become entitled to their state pension are pretty slim)
      2. Why they should draw their tax free lump sum, and why you are recommending the maximum
      3. Why you arent recommending that they dont opt for drawdown (and why they shouldnt just wait till April and make use of one of the two new options which should be available then)
      4. What type of annuity they should buy – single, joint, level, increasing, guaranteed or not, investment linked or conventional
      5. Which provider (taking account of underwriting)

      The first four will all need to relate to the client’s personal financial position.
      Add on to that the regulatory requirements.

      How long would it take you to write the letter?

      If it’s less than a couple of hours, do you fancy a job?!

  • Hmmm, £1,000 fee for a £30,000 piece of business – looks like the old 3% initial commission deal was about right then!

  • Hi Phil,

    Anyone with a pot of £30k would either have significant alternative funds for living in later life or be in effect dependent on what the State will provide. Either way the decision process is hardly complex or life changing given the flexible future for pension funds.

    Certainly I would expect any adviser to deal with this scenario without the need for the kind of process you have described.

    We are called advisers and most people expect us to possess sufficient experience and knowledge to advise without making simple issues complex.

    I know people like to refer to the regulator lurking in the background but doing what is right for the client need not be accompanied by so much unnecessary baggage just to ensure one’s bum is covered..

    • It’s very easy to be critical, Phil, but I would have hoped for constructive criticism from somebody with your experience.

      How about describing the process you would use, rather than just saying mine is rubbish?!

  • Cant see where I said anything about rubbish Phil

    I just followed the conversation and expressed my opinion.

    £30K less TFC is not going to buy anything worthwhile in the annuity market for either circumstance and as the tax treatment of the money will be the same if taken under trivial rules I would be looking for a constructive use of the fund either as new tyres for the fabled Lambourghini or perhaps some improvement in living conditions for the other scenario.

    You must know by now that I despair at the way in which our industry makes simple matters very complex – indeed you repeat this mantra often yourself.

    .Charging someone a thousand quid for what used to be a max of £300 annuity commission isn’t made any more justifiable by a mountain of paper.

    Really sorry if you think I am being offensive cause I am not at all.

    • I think that if you combine our thinking processes you can get a simple solution, which would cost little to implement.
      If the pension rules were changed so that you were only allowed all the complicated options if you had more than a certain amount (say £60,000), and if you got to state pension age with less than that, it was just paid out as a lump sum, then that would mean that there was no need for advice and people with small pots would get what you are suggesting.

      If your pension fund was less than this minimum amount, the lump sum could be taxable, and this would provide an incentive to save up a sensible amount in pensions.

      I dont think that the industry has made things complicated. The blame for complexity lies with politicians and HMRC. Did anybody in the industry ask for two additonal options for pensions at retirement next year? But George Osbourne and HMRC created them anyway.

  • Hi Phil,

    We have to deal with what we have and not what we would like sadly.

    I believe that the whole sorry pensions mess was brought about entirely by the providers and that if the legislators can’t quite see the wood for the trees it is because of the deliberately opaque and utterly confusing and confounding nature of provider pension products.

    We do now have simplicity with existing pots – albeit after next April – but just watch how the providers make life very difficult for anyone with what will be called a ” legacy ” product if they try to make use of the liberation rules.

    There is a long way to go before the industry – providers – are made to think about their customers rather than themselves Phil and they will continue to allow all of the criticism to be levelled at regulation and legislation or indeed greedy salespeople – distributors as they call us.

    As you have said many times this is a simple business made very difficult by the vested interests who are still at the heart of things for many.

  • Phil, Philip, Stanley,

    Thanks for all your comments.

    There’s some food for thought in this for providers as much as advisers, I realise that. I suspect we share a collective aim to make things better for as many customers as possible, while operating viably from a commercial perspective.

    Whatever happens, we can be sure the retirement advice challenge will be compounded in April 2015, even if there are some clear benefits for many in the rule changes.


  • It is simply impossible, in my view, to deliver quality comprehensive regulated financial advice in the current regime for under £400 a pop.

    I’ve rattled by brain (and better brains than mine have also been rattling) for a way to deliver service to the mid market. I’ve given up. The better brains might come up with something.

    But the boys with the jobs aren’t really bothered whether we find a solution or not. HMRC estimates the additional tax take on flexible pensions at £4 billion by 2020. Good work. Just as well yesterday’s “vulnerable pensioners” became today’s “empowered investors” otherwise this whole fiasco would look like daylight robbery.

  • Of course this advice can be given for £400 and yes some firms are… but that doesn’t mean it is either profitable, sensible or suitable. As most have a PI excess of £2,500-£5,000 it would seem fairly high risk to offer advice and implement a “fixed for life” product (if indeed one is required) that does not do the job thoroughly to the satisfaction not just of the client, but regulator, PI and ultimately anyone that might be tempted to buy an advisory firm. If all of the responsibility is passed back to the client, without any possible recourse (including from a spouse, or beneficiary) either now or in the next 1,000 years, regulator and PI provider are happy (and promise to always remain so), then perhaps there is a way to do this work for £400, but I prefer to be a realist…. which means that I don’t welcome the prospect of “cheap” advice not because of the “competition” but because of the likely resulting collapse of firms and higher PI & regulatory fees for the rest of us.

    I have to admit to being perplexed by the fee level discussion… if this was a £30,000 car, it would need taxing, insuring, MOT, servicing, tyres, fuel etc (and a decent driver who can still suffer accidents)… now which part of £400 would cover all this (a product that doesn’t even have to last for LIFE?) even the best mechanic (aka DIY investor) has to pay for road tax, fuel, parts and insurance.


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