Daniel: conflicted fund recommendations and a pension switch
Daniel, 29, has £15,000 to invest for at least 20 years and wants 'something simple and cheap'. He is a basic-rate taxpayer with no dependants and a £10,000 cash emergency fund. At a meeting, an adviser at a small firm recommends the firm's 'Premier Growth' fund, which has an ongoing charge of 1.10% plus a 0.60% platform fee, rather than an index fund tracking global equities at 0.12%. The provider pays the firm a 0.35% annual revenue share on Premier Growth holdings, and the adviser's bonus is based on the value of funds sold. The adviser also suggests transferring Daniel's £40,000 workplace pension to the firm's SIPP, which has a 2% entry charge and a 0.45% annual fee, saying 'it will be easier to manage everything in one place'. Daniel's current scheme charges 0.25% a year and has no exit penalty. The adviser gives Daniel a two-page key features document and asks him to sign the application forms at the meeting.
1. Identify the regulatory and ethical failings in the adviser's conduct.
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Inducements and conflicts. The 0.35% revenue share and the sales-linked bonus are inducements that create a clear conflict of interest. Under FCA rules, inducements must not impair the quality of service to the client, must be disclosed and, in advised retail business, commission from providers is banned. A revenue share of this kind is unlikely to be permissible unless it is a properly disclosed platform charge passed on for a service to the client.
Suitability. Daniel wants simple and cheap over 20 years. A 1.10% fund charge plus 0.60% platform fee is 1.70% a year against 0.12% for the index fund, a difference of about 1.58% a year. On £15,000 over 20 years, that compounds to a very large opportunity cost. The advice does not appear to be based on Daniel's objectives, and no analysis of the cheaper alternative is documented.
Pension switch. Moving £40,000 from a 0.25% scheme to a 0.45% SIPP with a 2% entry charge costs £800 immediately and £80 a year more, with no evident benefit beyond 'one place'. The adviser has not compared benefits, exit charges, employer contributions or investment options.
Consumer Duty. Fair value, consumer understanding and good outcomes are not demonstrated. A two-page document signed at the meeting raises questions about whether Daniel understood the charges and the conflict.
Process. There is no evidence of a suitability report, charges disclosure or client agreement. The bonus structure is a firm-level governance failure, not just an individual lapse.
2. What should the adviser do now to put Daniel's interests first, and how should the recommendations be justified?
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Decline to sign on the day. Daniel should not be asked to sign at the meeting. Give him time to read the suitability report, charges schedule and conflict disclosure, and to compare alternatives.
Disclose the conflict in writing. Explain the revenue share and the bonus in plain language, state that they create a conflict, and confirm that the recommendation is not dependent on them. The firm should ideally remove the revenue share and the sales-linked bonus rather than rely on disclosure.
Compare products on the client's criteria. Build a clear table: index fund at 0.12% versus Premier Growth at 1.70% total, showing projected values over 20 years under reasonable growth assumptions. If the adviser still believes active management is suitable, they must explain the expected excess return, the risk, the manager's process and why it justifies the cost, and document the reasoning.
Pension analysis. Compare the workplace scheme with the SIPP on charges, investment range, employer contributions, protected benefits and services. On the facts, the switch is hard to justify: £800 entry plus higher annual charges for no clear benefit. If the aim is consolidation, consider a partial transfer or keeping the scheme.
Suitability report and records. Set out objectives, risk profile, capacity for loss, charges, alternatives considered and the recommendation. Give Daniel a cooling-off period and confirm his understanding. If he declines, no pressure.
3. What firm-level controls should be introduced to prevent this recurring?
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Remuneration. Remove sales-linked bonuses and provider revenue shares for advised retail business. Pay advisers on a salary or fixed-fee basis, or on measures that do not reward product sales.
Product governance and fair value. Maintain an approved product list with documented value assessments. Include low-cost passive options and compare total costs, not just headline fund charges.
Charges and disclosure. Require a standard charges comparison and conflict disclosure at the first meeting, with a client agreement and suitability report before any application is signed.
File reviews and monitoring. Independent pre-approval or post-sale reviews of pension switches and high-charge recommendations. Set limits on switching activity and track complaints, cancellations and persistency.
Training and culture. Train staff on inducements, suitability and Consumer Duty, with clear escalation routes for conflicts. Senior managers should own the conflicts policy and receive management information on revenue shares, bonuses and switch rates.
Consumer Duty outcomes. Monitor whether clients understand charges and are receiving fair value, and act on poor outcomes, including remediation where clients have been disadvantaged. Record the actions and report to the board.