Hundreds of millions of pounds of unsuitable pensions and investments are sold every year, with sellers cashing-in on commission. In my mind, the end of commission-based investment advice can’t come soon enough.
Those of you who’ve been sold a poor pension or an investment that promised much but delivered little won’t be surprised by this stat – the mis-selling of financial products costs consumers up to £500m a year.
According to the Financial Services Authority (FSA), £250m worth of unsuitable pensions and investments are sold annually, but that figure doubles when you include fees and commission.
To that end, the FSA is proposing a ban on financial advisers receiving commission on investment products they sell. Advisers would instead have to agree the cost of their advice with the consumer.
A host of mis-sold products
In last month’s issue of Which? Money, we reported on structured products. These are investment products that claimed to offer high returns and guaranteed capital protection. We found that, in many cases, they weren’t fit for purpose.
They have often been sold to cautious savers who ultimately lost out due to poor value, rising inflation and, sometimes, risking their capital due to not being covered by the Financial Services Compensation Scheme (FSCS).
These are not the only products that have been mis-sold. Over the last year, our Helpline has been inundated with stories from members who have been mis-sold financial products. One couple told us about three investment bonds they’d taken out, where commission totalled £20,000 or 8.6%.
Our advisers told them that they could get the same policies at a fraction of the cost through fee-based IFAs. They are still in their cooling-off period and have the option of cancelling, but many people have not been so lucky.
Cut the commission
While we all know that investments can go down as well as up and that there is always a risk, we believe high charges and commissions just push advisers to make decisions that don’t have consumers’ best interests at heart.
Also, paying by commission can often end up being more expensive. While it looks tempting because you don’t have to pay a lump sum, it can affect your investment’s long-term growth since part of your money is being used to pay commission rather than being invested.
Lord Turner, the FSA’s chairman, has said that, ‘A depressing amount of people’s money is disappearing in intermediary and admin costs.’ I agree – when it comes to selling pensions and investments, it’s time that we removed the bias associated with commission.
In two years time, this will finally become a reality in the IFA market. However, the regulator needs to ensure that standards are also improved in the way banks deliver advice to customers.