Yellowtail Blog

From time to time we take on a client who has (in our opinion) received bad advice warranting a formal complaint against the former adviser. The following tale describes one of those cases which we had to take to the Financial Ombudsman Service who finally found in our client’s favour, though not without more than a year spent working against a particularly intransient former adviser.

For a long time our client had been taking advice from an adviser belonging to a network of advisers called Openwork - this is a firm in which Zurich have a large financial interest and which is essentially a multi-tied version of the old Allied Dunbar group of advisers (multi-tied means that they sell products from a limited range of companies though this is not the same as being independent).

Virtually all the client’s pensions and investments were tied up in Zurich Life products and for a variety of reasons the client felt he wanted to diversify away beginnng with his pension. Not wanting another Zurich pension he was introduced to someone from Zurich Independant Wealth Management to provide an alternative.

Following a series of meetings in 2005 (held jointly with both advisers, the tied and the independent together) it was finally suggested in February 2006 that the client transfer his entire pension into a new Norwich Union contract, though at the time the client raised questions about the inheritance tax position of the pension fund.

The transfer to Norwich Union went ahead and between them the two advisers shared more than £9,000 commission - more on this later.

Then in March, in a flurry of activity before the changes to pension legislation a new recommendation was made, this time to transfer the pension from Norwich Union to an offshore pension provider called London & Colonial who had a particular “open annuity” and “protected cell” structure to make the inheritance tax position better.

So, in less than 6 weeks the pension fund was transferred again, this time to London & Colonial. However it did mean that the advisers this time shared commission of more than £23,000 - because of another product they inserted into the mix, this time a Clerical Medical Offshore Investment Bond, and it was this product that paid the commission (and landing the client with yet another tier of charges).

The transfer to Norwich Union was clearly unnecessary from the client’s perspective, but let’s not forget that it did net Zurich and the advisers more than £9,000 of commission. You would think that as the money was transferred away from Norwich Union so soon they would have applied a penalty or recovered the commission, but surprisingly they didn’t. The client therefore suffered no loss over this transfer, but surely Norwich Union’s shareholders and policyholders did?

The new London & Colonial contract appears to meet the client’s needs, but we wondered why the offshore bond was included as it only served to increase charges and pay commission. Zurich and its advisers continually defended their actions and the level of commission received - in all more than £32,000 - an eye-watering amount by anyone’s standards and approximately 8% of the pension gone in commission!

The Ombudsman handling the case agreed with us and suggested that the original commission of c£9,000 was an adequate reward for the advice to transfer the pension from Zurich to London & Colonial. The Norwich Union contract, although causing the client no financial loss, was unnecessary. The Clerical Medical Bond was also unnecessary. The Ombudsman therefore ordered Zurich to undo the underling Clerical Medical Offshore Bond, along with it’s associated commission and charges, and make a payment into the London & Colonial pension as if the Clerical Medical Bond had not existed - I calculate that this comes to more than £23,000 mainly to cover commission payments as well as Clerical Medical’s own fees and charges.

This is a shocking case, not least because it looks as though the advisers abused their position of trust for their own material gain, motivated by a double helping of commission.

One client, one pension, two advisers, and four insurance companies sounds like too many fingers in the pie, with the advisers picking some particularly juicy plums!

In one of the trade papers Clerical Medical comes under fire for axing trail commission, briefly, a story about Clerical Medical ceasing to pay the ongoing trail commission to advisers that no longer provide a service (I cover trail commission in another blog article called what is commission). Anyone that knows me will understand that I am unlikely to get upset about this decision from Clerical Medical, however after some discussion with them earlier this year this does come as a bit of a smack in the face.  

Why? Well earlier this year we asked Clerical Medical to stop paying trail commission on our clients policies and pension plans. Because of our 100% fee only model, commission, whether paid at the outset or ongoing, was no longer part of our charging regime. We can stop trail commission said Clerical Medical. So to clarify things we asked exactly how our clients charges would reduce. Our thinking was; if part of the annual management charge is simply paid to us, then surely if we no longer received it their would be a corresponding reduction in the level of charges. 

Er, no! Clerical Medical were going to keep it.

A conundrum, what should we do? In the end we found the clients a cheaper product, one paying no commission, and we arranged to switch the contracts free of charge. What a waste of time and effort, and a display of greed from Clerical Medical - an accusation from other advisers following this current action.

Returning to the article; I am dismayed by some of the comments from advisers hitting out at Clerical Medical. One adviser, who shall remain nameless said the following  “The client they have removed my trail from has not done business with me for years but if they asked for advice on financial planning, I would provide it. Will Clerical do that? Will they offer fair, unbiased advice on their with-profits fund, for example, if the situation comes about?”

Morally what right does this adviser have to continue taking money from someone who no longer appears to have a relationship for advice? And why are clients still in the Clerical Medical With Profits Fund? They’ve been taking the trail commission yet not giving advice on a defunct fund. Ignoring a fund that has returned virtually nothing throughout the raging bull markets post 2003 is an admission of abject failure. And that’s what’s wrong with commission!

I was having a chat with one of our professional advisers earlier this week, and we talked about why we charged our clients fees instead of relying on commission as a means of payment. What I said was a revelation to him, commission (he thought) was simply a case of the product provider paying the fee rather than him dipping into his own pocket. He isn’t so niaive as to believe that he wasn’t really paying for it, but the amount of money involved was a real eye-opener.

In the same week as we introduce a new fee structure that relates solely to our advice and service proposition, I am starting a discussion on my personal blog around the whole subject of fees and commission. If you want to read it please go to  my own blog Random Thoughts from a Financial Planner.