- What is the reduction in yield calculation and why do Advisers need to calculate it?
The FCA requires that on any replacement business you undertake appropriate cost comparisons, factoring in all costs, and the reduction in yield calculation is one way to do this. It’s designed to give investors a clear and transparent view of all costs and charges that impact their investment portfolio i.e set up charges, exit penalties, ongoing charges, Adviser charges, provider and fund charges.
- What are the challenges Advisers/Paraplanners face in getting this calculation?
For pensions transfers, historically projections on existing plans were obtained and compared to projections on the new plan, to provide the cost comparison. This could be a lengthy process, depending on the provider, but was used as it showed the monetary impact of the different charges for a clients plans. This way of comparing charges however has many issues. It can take weeks and weeks to get projections through. In addition, they don’t always factor in every type of charge i.e. Adviser charges may be missing, and they aren’t wholly objective as they are being generated by the product provider. Comparing the projections to the explicit charges a company has provided do not always match, which can be extremely complicated to explain to clients.
- In terms of pension switching ‐ why do you think that reduction in yield is an appropriate alternative to the traditional methods used to transfer pensions?
Going to the product providers for projections is not the only way in which Advisers and Paraplanners can get a reduction in yield calculation. As the objective is to show the impact of all charges over time and an average on an ongoing basis, a reduction in yield calculator can be a viable and very effective alternative.
- How compliant is this approach to pension switching?
We posed this question of Rory Percival, before he left his role at the FCA, and he confirmed in writing that getting projections is not an FCA requirement. The requirement for the Adviser is just to show a clear demonstration of charges.
- How long have you been using this method in your own paraplanning company Para‐Sols and will this become a standard process you follow in your new compliance firm Apricity?
80% of my Adviser clients use a reduction in yield calculator now, instead of requesting projections from pension providers. We will also be putting it into practice in our new compliance firm, Apricity, as best practice.
- Can it be used for other types of investment?
Typically the reduction in yield calculation has been a requirement of pension transfers but really it is suitable for any investment comparison and we now use it for ALL types of investments.
- Why is having the calculator as part of FE Analytics of benefit to Advisers?
The new Reduction in Yield calculator in FE Analytics is great as it is a straightforward, step by step tool that allows you to see the impact on the clients’ monetary value of the charges levied against their investment. If the clients’ portfolio is in FE Analytics already, the information pulls straight through with the associated fund charges. The FE Reduction in Yield calculator also contains bid/offer spread which is less common now but still relevant to some investments and pensions. The calculator allows you to drill down to a good level of detail on each charge, is flexible enough for most investment types and provides a clear and transparent summary for clients that can be included in client reports.
- Does the current MiFID II regulatory landscape have an impact on Advisers need to calculate reduction in yield?
Given the main objective of the new MiFID II legislation is to support better outcomes and transparency for end investors, the need for clarity and simplicity in explaining charges to clients has never been more important.
- What type of Adviser firms should be looking at this?
All advisers who do replacement business! I can’t see a fair way of providing advice on switching investments unless you are using an independent reduction in yield comparison tool.