There has been much discussion within the financial advice sector on the term “insistent client” ever more so with regards to Defined Benefits transfers and how this should be approached. Let me nail my colours to the mast from the outset.
There is no place for “Insistent client” within the Financial Planning Profession for the vast majority.
Defined Benefit Pensions are highly complicated even for the most experienced and qualified Adviser. The starting point is that DB pensions provide valuable benefits that should not be given up lightly. For most people, staying in the DB scheme will be the best course of action.
The FCA clarified that characterising of an ‘insistent client’ is one who is acting a personal recommendation. If the advice is not to transfer, you have to ask questions, why would an individual ignore professional advice? Alternatively, why would an adviser transact “Insistent client” apart from the contingent charge swaying that decision?
It has been established that most clients do not have the financial literacy to fully understand the complexities of such actions and ultimately leads to pension ruin, running out of income later on in life.
Advisers are hiding behind Insistent client declarations, however, this provides no certainty of future treatment for advisers, and it is naïve to think otherwise unless dealing with a sophisticated or experienced investor who is more likely to understand the consequences of acting against professional advice. It is not unreasonable for advisers to recommend “no transfer” and that, in many cases, the individual in question is “making an ill-informed decision”.
Here are a few examples:
Client (A)-aged 57, had already made their decision to transfer as everyone else was doing it at work and was seeking out an adviser to sign the paperwork, it was clear that he had been around a few advisers.
With a guaranteed index-linked pension of £7,500 per annum, the scheme was offering £149,000 transfer value or 19.86 times the pension. There were very few additional assets although there was a small additional defined benefit of a few thousand from 65.
Client (B)-aged 65 had a guaranteed indexed pension of £18,500 per annum having been offered a pension transfer of £300,000 or 16.21 times the pension they sought to transfer again very few other assets.
Both transfers offered poor value in my opinion; however, the clients did not understand the consequences of their actions. Client (A) risk tolerance was 3 out of 10 and did not want to lose any money. Client (B) risk tolerance 1 out of 10 with a low capacity for loss.
Both were advised that the Guarantees within their schemes provide the most suitable option to provide security index-linked throughout their lives.
The advice provided is the best outcome for both these clients to my surprise both clients sought further advice, the result was both have transferred on an “insistent client” basis for a fixed fee of £10,000.
Client (A) fee represents a whopping 6.7% the client will likely to run out of income before 75, Client (B) on the other hand has a higher transfer value; however, the risk level is not consistent to even consider a transfer, never mind the poor value being provided by the scheme.
Pension freedom has provided access to these funds however this comes with the responsibility to protect clients from themselves. The problem is, with insistent clients by facilitating a transaction the adviser knows is not in the client’s best interests, “I do not think that is defensible”.
How can any client be considered competent to ignore professional advice? It is a bit like a patient insisting on performing their heart surgery against medical advice. I have little doubt it will end in a claim in the future.
One of the most significant consequences is market volatility which can erode returns early on in retirement, a situation from which funds may not recover. An unsophisticated client is unlikely to grasp this consideration.
In the context an “insistent client” under the current legislation there is no such thing, the FCA has steered away from advocating or supporting this process although they have updated the sourcebook.
Where a firm proceeds to execute a transaction for an insistent client which is not in accordance with the personal recommendation, the firm should communicate to the insistent client in a way which is transparent, fair and not misleading, and have regard to the information needs of the insistent client so that the client can understand.
With the following guidance:
1. the firm has not recommended the transaction and that it will not be in accordance with the firm’s personal recommendations,
2. the reasons why the transaction will not be in accordance with the firm’s personal recommendations;
3. the risks of the transaction proposed by the insistent client;
4. the reason why the firm did not recommend that transaction to the client
If someone comes to you and wants to blow the cash and you think that is the wrong advice – just send them packing.
The whole view seems predicated on the assumption that whatever happens the adviser has to engage with the client. We are not obliged to service anyone and everyone who crosses our threshold. Better to forgo a fee than encounter the aggravation of the Ombudsman later down the line. Get ready, the claims are in the post if you have been transacting insistent client work.