Will the exit fee cap affect the advice model?

Will the exit fee cap affect the advice model?

The Financial Conduct Authority, (FCA), is currently consulting on a 1% exit fee cap for pension exit penalties. For Martin-Redman Partners, with fixed initial advice fees and a lean product mix, this will have a minimal effect as very few advised pensions will have any exit fee whatsoever.

Some advice businesses will be affected although their public pronouncements suggest otherwise. Money Marketing carried an article that suggested that St. James’s Place (SJP), a large wealth manager with a vertically integrated advice model, (they design the product, control the funds, provide the advice and take a profit from each stage), would be adversely affected, although a spokesman denied it. (See the full article here).

Pension products with SJP have an initial charge, which apparently varies and an early exit penalty of 6%, going down by 1% per annum. This would suggest that in the early years, they would fall foul of the FCA proposal. As Pension Freedom appears to grasp flexibility above most things, it strikes me that SJP’s current charging structure cannot survive for the over 50 year olds.

Looking harder at the SJP pricing structure makes it hard to see where any retained investment growth is possible. A quick visit to www.trustnet.com shows that the 35 SJP funds are subject to a 5% bid-offer spread, so getting in to or getting out of an SJP fund will cost you at least 5% of your investment. As the return on a good balanced fund these days is likely to be about 5% per annum, changing or leaving funds will cost the unfortunate client about a year’s investment growth. How this squares with a 1% exit fee cap is hard to see, but I suspect it will be out of scope as the bid-offer spread is a “fund cost”, not an “exit fee”. If I was the client, I would consider anything that reduced the fund I had to keep me in retirement to be an “exit fee”, no matter how it was dressed up.  

Some people derive a lot of pleasure from owning expensive things; if we only made rational decisions then more people would buy a Seiko watch and fewer would buy a Rolex. In investments, the only thing that actually matters is the quality of the underlying assets and the cost to hold them. Everything else; the sales fluff, gilt edged documents, heavy card invitations and exclusive events are just entertainment. Insubstantial, transient and ultimately irrelevant.

If you would like to know more about how we can help you plan and realise your financial goals then contact us at info@martin-redmanpartners.co.uk or call us on 01223 792 196.

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.