Advice on defined benefit (DB) pension transfers has come under intense scrutiny, particularly as stories of British Steel Pension Scheme members receiving a questionable service have emerged.
While the FCA now appears to be cracking down on some firms, it has served as a moment for advisers to evaluate their processes.
Advisers always have and always will do thorough due diligence on the partners they outsource any pension transfer work to, aligning the two businesses together to ensure a good outcome for clients.
However, what we have learnt in this short period of time is there are a lot of things advisers can additionally do. It’s about listening, learning and talking to other experts in the field, and ensuring everything is documented.
While advisers are likely to be ensuring their advice is suitable as a matter of course, especially given the current circumstances, this needs to accurately evidenced.
The FCA is now beginning to put a lot of signals out when it comes to DB transfers, and is engaging directly with firms. The documentation doesn’t just apply to the suitability report. It’s a case of taking note of what the FCA is saying and then making sure you write down all the things advisers take into account automatically, such as the client’s specific circumstances, their personal needs and objectives and how it relates to the specific investment.
Any files to do with a DB transfer have to absolutely watertight, with everything written down, evidenced and linked up. There is that much scrutiny now.
Yet while making sure all the documents are in order, there is little point if the client does not understand it. There is very little unsuitable advice out there, but it could be argued there is a very large proportion of unclear advice when you look at DB transfers.
If an adviser does their fact-find properly and thoroughly, many cases won’t even make it to the suitability report. This is why understanding your client’s circumstances and individual situation is so important in the advice you provide.
DB transfers are not simple. Indeed, a lot of the issues around the DB transfers debate come down to ensuring clients fully understand their existing benefits and the potential risks of any transfer.
The profession talks a lot about protecting ourselves and giving the right advice, but at the end of the day we need to make sure clients understand. This is a big challenge, but the FCA is very keen on this as well so there is an opportunity to get this right.
Documentation is great, and clients walk away with their suitability report, but the question that should be asked is: do they really understand it? We need advisers that can communicate with real people in order to make this work.
Building client understanding into the advice process is key when it comes to DB transfers. There are examples where advisers have asked the client to physically write down the reasons they want to transfer, with a pen and paper. It might sound simple, but activities like these focus the client’s mind on exactly what it is they’re trying to achieve and gives them a better understanding.
The better they understand, the better position everyone will be in.
Claire Trott was a panellist at our recent roundtable debate on DB transfers. To read our in depth report 'Making sense of the DB transfers saga' click here