Charge comparisons for replacement business (RIY)

Gustavo_Fring

Hello, how do people structure their cost comparisons in replacement business letters? We’re having an internal debate here around the inclusion of adviser charges.

The scenario is transferring 3 x PPPs to a SIPP. The client has not previously taken advice so there are no adviser charges/trail on the existing plans. My view is that we exclude adviser charges from the RIY comparison as even if we were to retain the PPPs, they would still form part of our ongoing review service so the adviser charge would be incurred, regardless of the recommendation to transfer or retain the plans.

Thoughts?

Nath

We do both in this scenario. One on a like for like basis with no advice costs and one with, to show the impact.

It would be dangerous to not include advice costs as you need to show the impact these have on the plan both initial and ongoing advice fees should be factored into the new RIY. You could argue if not paying advice costs via the product you wouldn't need to but if taken via the product then definitely include.

richallum

I'm with @Nath on this. You must include the actual charges the client will pay with the new contract and compare with what they're actually paying now.

Gustavo_Fring

Thanks both. My suggestion would still include the overall charges the client will pay (including advice) as part of the ex-ante cost disclosure. However for the purpose of the comparison, I thought it would be more 'apples vs apples' if we accept that their pensions would form part of ongoing reviews and be subject to our advice fees, regardless of our recommendation to transfer?

Nath's suggestion of both might be the way forward!

richallum

Can all the existing contracts facilitate your advice fee and does your TOB state that it will be charged and taken from them even if the advice is to stay where it is?

Jona

I tend to follow @Nath approach.

no advice fee comparison for a "like for like" basis and to, hopefully, demonstrate a positive difference for the client in terms of reduced costs.

then a further one including the advice fee that essentially says "and if you want and value our advice - which you are not getting at the moment; this is the cost".

benjaminfabi

I have a table that does basically what Nathan has said:

Cost description
Product
Investment
Costs of initial advice
Total solution cost

Cost of ongoing service
Overall costs

The costs of initial advice are a straight line depreciation of the initial fee over the expected term of the contract (eg a pension 10 years from NRA where you are taking a 2% initial fee would show this as 0.2%).

richallum

@benjaminfabi doesn't that underestimate the effect of the initial fee?

benjaminfabi

If you think about how the software providers calculate RIY they're calculated over the term of the plan.

A 2% initial charge over ten years adds _about_ 0.2% to a selectapension/O&M RIY. I don't see my method as being materially different. True, it doesn't show the effect of the fee through an RIY calculation but the rules don't say that's required. This method is more than good enough (author's opinion) to meet FCA replacement business standards.

I wouldn't say it's an understatement of the effect of charges, rather an absence of it , but that applies to all the fees not just the initial adviser charge.

The full initial fee is disclosed in the KFI, with the regulatory RIY, and on the main costs page of the report.

richallum

Thanks @benjaminfabi do you just show that table for ceding & new and write a comment about the different (e.g. new is 0.3% pa more but it's worth it because.....) or do you do any other calcs such as comparison of projected values or RIY?

What do you do if ceding scheme has old charges like capital levy etc?

benjaminfabi

Yes just that usually. Also, I don't always include the table if it's not the main driver and the new plan is significantly cheaper. In that case the file would still have the calculations but the report would just have a statement saying that switching will save £x thousand a year based on the current value.

Obviously the new plan charges are itemised in the main costs section.

My calculation spreadsheet will calculate a reduction in yield and future values and required returns based on the input I give it in a very similar way to selectapension and O&M. So the option is always there for me to include those numbers. I never do.

If there are capital units these are typically factored into the investment costs. Any other one off costs, like dealing fees or penalties all form part of the 'costs of initial advice' line and are explained in the notes.

richallum

Thanks. We are just starting a project to challenge the way we do cost comparison hence all the questions.

benjaminfabi

Happy to chat offline 👍

richallum

Thanks. Will take you up on that for a sense check.

Nath

@richallum We used to predominantly use Select-a-Pension for projection comparisons for pensions but now use cashcalc for RIY comparisons and our own in house sense check on this too for all replacement business. We then put a table in the report showing on a like for like basis, then with our advice costs with some simple explanations. We usually follow this up with a paragraph stating if more/less expensive and why beneficial to move still.

We also mention that if the client wishes to engage but is not transferring then advice costs would have to be met a different way but would still be payable regardless. (As in most cases like for like is cheaper but with advice costs, total is then more expensive so we like to quantify this).

N