Platforms should let advisers select disinvestment strategy to enable payment of adviser charge, says expert

Financial services and pensions law specialist Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, said that the disinvestment arrangements would have to be triggered automatically because it would be too expensive for platforms to make "manual interventions".

Laight said that the forthcoming rules on adviser charging, coupled with the ban the Financial Services Authority (FSA) has imposed on cash rebates, meant that there is an "accentuated need for auto disinvestment strategies". He said that such strategies were always "essential for pension wrappers" in order to "avoid disputes over benefit payments not being paid on time or when expected".

"An auto disinvestment strategy used to be necessary in pensions to pay minimum drawdown payments required by tax legislation – but that requirement has fallen away," Laight said. "When it was there, to have defaulted on paying a drawdown instalment would have triggered tax charges."

Under its Retail Distribution Review (RDR) the FSA has set out new adviser charging rules which, from the end of this year, will require that advisers only receive payment for their services from clients. The regulator introduced the rules after expressing concern about the way advisers are often paid commission from product providers for recommending their products to clients. This arrangement creates the risk that advisers may not always provide personalised recommendations that are best suitable for clients, the FSA has said.

To expand on the principles of its adviser charging rules, the FSA has said that it will ban product providers from paying cash rebates to advised clients. In a consultation paper published earlier this year, which detailed the regulator's intention to apply the ban to cash rebates paid through platform services, it made clear why it wanted to ban the arrangements.

"Our view is that cash rebates hinder transparency and potentially provide a mechanism for commission to continue being paid," the FSA said in the paper.

Cash rebates in a platforms context are currently paid to consumers' platform accounts. They are issued by product providers whose products have been selected for investment by consumers or advisers on their clients' behalf. Often a portion of the rebates are used to offset what advisers charge clients for their advice. However, whilst the FSA has outlined its intention to ban such arrangements, it has proposed to allow product providers to issue unit rebates to clients' platform accounts instead. The units would represent a value that clients could reinvest in particular products they are offering.

Platform providers have taken a mixed approach to how to deal with circumstances where there is not enough cash in investors' cash accounts to cover the adviser charge, according to a report by Money Marketing.

The report outlined how most platform providers will offer auto disinvestment solutions to advisers to overcome the problem. Only Standard Life said that it would not offer auto disinvestment opportunities for advisers.

Laight said that there were "pros and cons" to each of the various measures chosen by the platform providers. He said that whilst it might be easiest for consumers to understand an approach whereby disinvestment of their assets occurs on a 'last in, first out' (LIFO) basis, as some providers said they will do, he said that the "pitfalls" identified by one provider in the Money Marketing report were valid.

"There will be very good reasons why the adviser and the client made a decision to invest in a specific fund, which could be timed to reflect what is happening in the market," Aviva UK senior marketing manager Phil Ralli said, according to the report. "We felt taking all of the money from that last invested fund was a bit counter-intuitive and would probably disturb the plans the adviser and client have put in place."

Fidelity FundsNetwork said it would allow advisers to take their charge from a client fund they nominate, or from the largest fund if they make no nomination, according to the Money Marketing report. Skandia and Cofunds are among the other providers that allow advisers a choice of where to take their charge from.

"On balance, I favour running a dual offering," Laight said. "This would mean that customers and advisers could specify a default strategy from within a list of disinvestment strategies permitted by the platform, but where in the absence of one being specified a modified LIFO approach would apply."

"The modified approach is necessary to exclude certain investments from the LIFO rule, for example where the last investment made by an adviser on behalf of their client was in an illiquid asset.  It could be that the charge is derived from liquid assets on a LIFO basis before moving to illiquid assets if liquid ones are exhausted," the expert added.

"In the SIPP world, if there is no cash or assets to pay the operator’s charges or costs then often personal indemnities kick in. Clearly those indemnities from the customer need to be clearly sign posted at point of sale if any reliance is to be placed on them," Laight said.