/ Money

Put a stop to financial advisers’ commission

Business man carrying folders

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.

21 December 2010

As a retired IFA with my own successful business for 25 years i must say that Nick Cheek is portraying a distorted image which is typical of people that do not really understand the life,pensions,and investment business.I agree the industry had its cowboys but they left the independant sector at the early stages of polarisation and joined inwith insurance companies as tied agents or went to work for banks,or simply left the industry as the regulators rightly started to tighten up.

It is vitally important to maintain a healthy Independant sector with local representation for one to one personal discussion at the office or your home,i found this to be a client need at all levels.This level of service is expensive to maintain and a balance of commission and or fees is likely to be best for all. Regretably unlike accountants, solicitors,architects,and surveyors IFAs are unlikely to find an hourly rate acceptable to many clients.Because; life assurance and pensions generally have to be sold, often the need has been put on the back burner.the latter is a very complex provision and independant advice is essential.I donot consider Building Societies and Banks have the expertise to offer a total appraisal particularly for a client with a mixed bag of accrued pensions.

High net- worth clients in my experience avoid Banks for investment advice as they look for continuity year on year with IFAs that give excellent advice and service.

Most IFAs are very professional not living off the fat of the land and trying to run an essential financial service that is independant and not a side line as with the Banks who do live off the fat of the land and do not offer independant advice. They pick the plums to sell, its not in their interest to be independant,they tried it in the early days and found it too expensive to operate and staff.

The industry has had 3 regulators Fimbra,PIA,andFSA.They themselves cost the industry afortune to run in new books of rules ,vertually weekly changes at the start, our stationary, brochures etc had to be dumped each time a new regulator took over.Joe Public no doubt picked up the costs indirectly from the institutions and IFAs had to cover their own.

There was a need for regulation but the costs have not been recovered in benefits to the end users.Also sadly the IFA sector is shrinking with less new independants being able to operate a new business.This not because of on line facilty shopping.Those remaining have a growing work load which endorses the importance of this sector in the eyes of the investor.Get the means of reward for the IFAs work and advice wrong and they will dissappear like the small store to the supermarket. In their case the Banks and Institional direct sales.

Was you aware that the last two regulators were initially headed up by ex bankers.Both thePIA and FSA were aiming to water down the polarisation rule that gave a clear distinction between an INDEPENDANT ADVISOR and a TIED AGENT. This meant that the former was in fact the agent of the client and the latter the agent of the institution who employed them to sell their products.

This did not suit the banks because it meant they could only sell their own products which were often not competive in the market place.Some found a way around this by buying some well established household named institutions e.g Scottish Widows and Gartmore which enabled them to sell those company products.

Eventually the power of the banks and the nodding from the major assurance institutions, losing marketshare due to polarisation, as well as not being recommended by IFAs oncertain products, were able to get the FSA to allow TIED AGENTS to have several agencies inadditon to their own product.The FSA had clearly succeeded to muddy the waters and confuse the public!

So we now have INDEPENDANTS,TIED AGENTS of an institution,and MULTI TIED AGENTS. In addition the Regulators focused their attention at IFAs as the area to police ,we were easy prey for there regular visits,being relatively small businesses they could do one. in a full day.

The fact was that the urban IFA had to be whiter than white. Their trading overheads had in some areas trebled simply due to regulation and the last thing anyone wanted was a complaint from client.

Indeed my company only had one client complaint in 25years of trading ,it was not about mis-selling.The client had agreed commision basis for a life product.Itwas not straight forward and entailed evalution of the market and a familyTrust.There had been three progressive meetings and recommendations left to consider.He had been refered to us by his accountant.Some two months elapsed without any response to my polite follow up letters.

Eventually i spoke to the accountant who felt i should charge for my time, my terms of business allowed me to do this and as the client was aware of these i billed him for a very modest amount with a covering letter.He did not respond but complained to the Regulator that i was pressurising him. They inturn advised me and reqested to see all the documents involved.Fortunately they did not uphold the complaint and suggested i should the use the small claims court THE IFA IS LEAST LIKELY TO BE THE CULPRIT ON MANY OF THE ISSUES INVOLVING THE CLIENT LOSSES IN THE FINANCIALSERVICES ARENA !!

The FSA concentrated its efforts on IFAs and assurance institutions as the problem and not only took its eye off the Banks but gave them more opportunity to do business with multi ties. This is what the banks wanted, also any fines they got through mis-selling could easily be met by the shear mass market they enjoyed .They had a lot of clout in all the right areas and FSA happened be run by ex bankers.

The FSA failed to regulate the securitisation mortgage market which any IFA knows is a higher risk to the mortgagor because the mortgagee is usually self employed and self certifies his income.For this he pays a higher rate of interest for the term.The old style banks,before your time, were never interested in mortgages,banks never lent long,and so most people got their mortgage from a building society.However the banks wanted their slice of this growing market that the building societies could not fund as mutuals.But the greedy nature of the banks enticed them to buy up ready made mortgage books from the securitised market that were on offer with higher interest.Clearly this business would be top heavy with risk and it just goes to prove the lack of forsight that modern Bankers have outside of their usual remit.

Its not really surprising therefore that the FSA has a lack of foresight.They should have controlled this and the UK banking system would have been inbetter shape to have survived.

Its a bit of a joke for the FSAs current chairman to point the finger at intermediary and admin costs for people loosing on investments when the bankers have through greed have put the worlds finances into complete disarray.Then we have to bail them out to help recovery and the Bank of England. are in a difficult position holding down interest rates.IRONICALLY the people who benefit by these rates are the Banks.

It does not take much working out how the banks were able to recover from the edge of disaster into profit within a relatively short space of time.IT is not down to senior management having a shake up and requesting bonuses for acheivement.IT is down to low bank rates that the banks can buy money for against what rates they can lend at .For example when libor was 5% you would expect them to at least a3% mark up for a short term loan to 8%.Effectively this a 60%gross return, and not unreasonable.
Do the same excercise with current0.5%libor rate and a short term loan at 8%(if lucky enough to get it ),this would effectively produce a 1500% gross return.!!!!!!!

I suggest that both yourself and the chairman of th FSA are scratching at the surface and he does not seem to have refered to the banks,is this because they are now back under the Bank of England for regulation. Very cosy they seem to be in a win-win situation.

The original objective of the FINANCIAL ACT approx1986 was to make the clear distinction between tied agents and independant financial advisors,not to confuse the public with job titles like financial advisor like is used today.Alsoto maintain a healthy and professional independant sector readily available for the public to seek independant advice.

Regulation is important to maintain standards within the industry , but over regulation is as dangerous as underegulation. If overegulation impacks too heavily on the broader IFA sectors they will shrink to unacceptable numbers and the FINANCIAL SERVICES ACT would have failed. When you refer to the IFA market hopefully you will consider us in a more favourable light.

I used to take professional advice. Not any more. EVERY product that I have taken out in this way has let me down. Here are just 2 scenarios:
Firstly, the pension that I took out with my redundancy money in 1995 is now worth little more than the money that I put in. Big loss after 15 years of inflation. Lets hope that there is some growth within the next 2 years. My financial adviser should have told me to keep the cash, see it grow with interest and then divide it out when I retire.
And look at annuity rates, which is really what your pension via an IFA will pay you. Average returns are about 4% right now. Divide the capital, and you’ll see that just the cash would last you 25 years. Add on interest and the capital will definitely outlast you! If these annuity providers are not making at least that 4% in growth, then what are they doing. Oh yes! Creaming off pensioners money. And they manage to keep the residue, so your family can’t have any of it.
Secondly, as for the stock market being for the long term; RUBBISH!!!
I (on the advice of an IFA) took out an equity savings scheme in 1990. It was for an 18 year term. So it matured in June 2008. the growth on capital over that period was less than 2% compound (tracked and calculated using Excel). Luckily for me, it matured in June 2008, because had it been a 20 year plan, I wouldn’t have even got my cash returned, never mind any growth. Stock market for the long term; RUBBISH. Its all based on luck and is effectively gambling.

And as an aside, why are stocks “tipped”. If any stock is going to do well, surely its in the interest of the so-called tipster to keep quiet and make massive gains. Oh no; that’s not how it works. the hype of popularity in a share will drive its growth. Skewing the markets.
The whole financial industry should be thoroughly ashamed of itself. And I include IFAs who all talk the same talk. RUBBISH!