Need some unbiased financial advice? You’ll be lucky to get it in the UK. Despite the best efforts of a small part of the financial advice community to revolutionise the way they offer advice to their clients, the majority of our so called advisers are in fact no more than salesmen.
They are either ‘tied’ advisers which means that they sell you products invented by just one financial firm (which effectively employs them) or ‘multi-tied’ advisers which means that they will sell you products invented by a small group of companies on their “panel.”
The latter might seem mildly better than the former but from the consumers point of view they are both, in general, worse than useless: they exist purely to make you buy financial products whether you need them or not and they are paid hefty commissions based purely on how well they do this.
The good news is that consumers can also go to an Independent Financial Adviser (IFA) if they want advice – IFAs are supposed to search the entire market for the product most suitable for you. The bad news is that most IFAs are paid on commission in just the same way as tied and multi-tied agents, just by more different firms – i.e. product providers bung them a pile of cash if they sell you something but not if they don’t. So no sale, no holiday in the Maldives. This means that they too – despite their regular fury at the very suggestion – can’t really be seen as much more than sales people either.
The future of financial advice
With all this in mind, I think we can welcome the latest version of the Retail Distribution Review – designed to look at how we pay for financial advice – from the FSA. There was a discussion paper out on this last year and the most recent publication is an interim review. It is, says Matthew Vincent in the FT, full of “feedback, discussion, discursion, disclaimers, and unintentional irony” but nonetheless “three startling clear principles” for the future of financial advice emerge from the fog.
First, only those who look at and recommend products from the entire market should be allowed to call themselves advisers (everyone else should be called exactly what they are – salesmen). Second, these advisers should have a higher minimum standard of qualifications than they currently do. And third, their remuneration should be determined “without product provider input.”
It is the third bit I like the sound of most. Why? Because it suggests that the FSA might finally be recognising that the current inherently corrupt commission based system just isn’t good enough. In my dream world, the FSA would insist that commission is abolished completely and anyone who wants to be considered a truly independent adviser must charge a flat fee for their services.
Sadly the power of the many lobby groups within the industry makes this unlikely. As MoneyMarketing points out, the paper makes clear that while the FSA wants to “remove the potential for bias,” it says it is not “currently practicable to stop payments passing from manufacturers to distributors.” I can’t for the life of me see why. And anyway without stopping the “payments passing” how do you end the commission system and rid the industry of its potential for bias?
All this is far from being over. There is another “feedback statement” on the way in October which gives plenty of time for the enemies of transparency – the big banks who like presenting their salespeople as ‘expert advisers’ and the commission only IFAs – to work on making the FSA water down these proposals even further rather than insisting on the introduction of across the board fee based advice.
Their main objection will be to suggest that implementing a fee based system will mean that the poor will not be able to afford financial advice (it is you see not about their incomes, oh no, it’s about their desire to help the poor).
This is a heart tugging argument but it is also utter nonsense. The poor pay for financial advice under a commission based system. It is just that they don’t pay for it all at once and that very often they don’t know they are paying for it. But it comes down to the same thing. And is it really a given that those without much spare cash really need financial advice?
The poor need savings, not IFAs
A post on one of the discussion boards about all this week noted that “the average family has less than £146 left at the end of the month after paying for basic over heads.” How, asked the ‘adviser,’ are these people “going to afford any financial products let alone pay for advice?”
The answer is that they aren’t. And that they shouldn’t want to either. They don’t need products, they need savings. And they don’t need an IFA to help them figure that out. Instead they need five minutes on the internet to look for the best instant access savings account out there and they need an hour or so at the benefits office to make sure they are getting all the tax credits and so on that Gordon Brown thinks they deserve. That won’t cost them anything in commission or in fees.
So we must now wait until October to find out who’s going to win this one. Will it be those lobbying for an honest simple and transparent transformation of the financial advice industry or will it be those determined to maintain as much of the status quo as possible? We can probably all guess the answer to that, but on the plus side at MoneyWeek, we have been compiling a list of IFAs who tell us they are fee only.