Non-advised annuity sales are coming under the spotlight as the FCA proposes changes to pension rules to enhance consumer protection that may result in a capping of commissions. This begs the question; “is this the end of non-advised annuity brokers”?
There seem to be two current views about non-advised annuity brokers. One school of thought is they provide an important service because they help people get the highest annuity rates, especially those who don’t necessarily have access to a financial adviser. The other school of thought is that non-advised annuities should be subject to tighter regulation including a commission cap or even better an end to commissions.
Both sides of the fence
I have been on both sides of the fence; I ran my own independent annuity advisor business and I have worked for a non-advised annuity broker. Although both models ensured clients got the highest annuity rates they got there in different ways.
I can argue both cases, and I have said before that providing the right customer journey is in place it may not matter where advice is given or not because the result is the same the highest annuity rate. But what is the right customer journey?
In my view, a vital part of the journey is a stage when a client reaches a junction they are helped to take the right path. One of the problems with no advice is that when a client comes to a junction; should I go this way or that way, the consultant can state the facts but they cannot actually give an opinion about which path to take. In their defence, non-advised brokers will say they clearly explain all the options and risks but in my view the way this is done is biased towards the solution they are selling and the process itself influences client behaviour.
Being more specific; there is little disagreement that shopping around for the best annuity is in people best interests but before people go shopping they need to know what they are shopping for. There is no point in getting the highest annuity rate if an annuity is the wrong thing in the first place.
A good adviser will politely challenge some of their client’s assumptions and have the confidence to tell them if they are making the wrong decision. You may have heard me say that if I had a £1 for everyone who said they knew they wanted a level annuity at the outset, only to change their minds when they fully understood all the issues I wouldn’t be writing this column now.
Fees v Commissions
The challenge for non-advice annuity brokers and the new breed of no-advice drawdown firms is why anybody would want a no-advice service when they can have an advised service at a potentially lower cost. Unbiased recently published a paper on the cost of financial advice. Taking the example of a £ 100,000 pension pot, they estimated the cost for advice on retirement options would be £ 2,000 and £ 1,000 for execution only. The commission paid on a non-advised enhanced annuity for the same pot is about £ 2,500.
Level playing field
It is not just about costs and me getting over sensitive about advice because after all people are mature enough to make their own decisions. The most fundamental objection to the current no-advice annuity and drawdown brokers is that the Government has created an unlevel playing field between those who want to advise and those who want to sell. The paradox is that there is general agreement that with pension freedoms people are faced with more complex decisions, so they require more advice not less, but the current rules seem to make advice appear complex and expensive whereas no advice is seen as simple and free. Everyone knows that commission is not free, so if it is banned for advisers it should be banned for no-advice so at least we stand a chance of having a level playing field.