At Lower My Charges.com we believe there is a huge conflict of interest when it comes to percentage charges being taken out of Pension products especially when the compound effect of the percentage deductions are not disclosed.
We found this article we wish to share with you which goes some way to emphasise disclosure should be made especially if the client is taking income from their Pension pot.
Disclosing the conflict of interest between decumulation and percentage fees should be good practice, Personal Finance Society (PFS) members were told yesterday.
Steve Gazzard, (pictured) director of SJ Gazzard Consulting and ex-interim chief executive of the Institute of Financial Planning, told delegates at the PFS symposium in London that Mifid rules mean advisers should disclose conflicts of interest created by percentage fees.
‘If you are charging ad valorem fees, once you are having the decumulation conversation i.e. whereby they might withdraw some of that cash either in a cash form or to buy an annuity then there is a potential conflict of interest there because it’s going to reduce your income.’
Gazzard explained that according to Mifid rules, any real or potential conflict of interest in an adviser’s business model needs to be recorded and advisers need to update the list regularly.
He said the guidance goes on to say advisers should manage or mitigate those conflicts, but where that is not possible IFAs should disclose them to the client.
However, Gazzard said it is good practice to disclose them even if advisers do have sufficient systems to manage or mitigate the conflicts of interest.
‘I think it builds trust,’ said Gazzard. ‘If you have developed a trusted relationship with clients and you are very clear, why wouldn’t you [disclose this] I think it can enhance the trust between the adviser and client.
‘If you say: “this is the way our business model works and we think we deliver great value, and by the way if this happens what we might think is: hold on, there is a potential conflict of interest”.
‘You can then tell them: “this is how we manage it. I am disclosing it not because it’s a problem but because I want to be really honest with you,”’ said Gazzard.
As well as building up trust Gazzard said taking this step would formalise processes that firms often miss because they are acting ethically.
‘[Advice firm staff] sometimes think “no of course we don’t have any conflict of interest” because they are operating ethically.
‘They tend to think “we are operating ethically, we are honest, why do we have to go through that process?”‘
The consultant said a lot of firms do not formally manage their conflicts of interests. Gazzard said the case of a client in decumulation paying percentage fees is an example of how declaring conflicts would help to address formalise processes the firm already in place.