Thursday, 20 January 2011

Will it be safe to take financial advice?

What are we to make of the Financial Services Authority or FSA's announcement that investment advisers will have to have a new certificate to show their clients?
It will prove that they have been trained, that they top up their training every year and that they follow a code of ethics.
"Did this not apply before?" I hear you ask. Apparently not.
At the same time as the new requirement is introduced, from January 2013, advisers will be banned from taking sales commission from investment providers.
They will only be able to work for transparent fees, paid either up front by the customer or in instalments.
As I've mentioned before, Barclays' massive fine this week for giving unsuitable investment advice was associated by some critics with the fact that it earned a hefty commission for selling the unsuitable funds.
And I've interviewed victims of poor investment advice who later found that a 6% inducement was being paid by the provider to the bank, a different bank in this case.
So the combination of better training, a moral approach and the removal of the financial incentive to mislead customers should surely be a good thing, a completely new start.
That must be true, to an extent.
However, I have been speaking to an experienced and highly regarded financial adviser, who is sceptical that the taint of commission can be banished so easily.
He is an "independent" financial adviser so, admittedly, he has a motive to do down those competing advisers who are tied to banks and insurance companies and sell investments from a restricted list.
But his worries probably apply as well to some IFAs, as the independents are known.
What he says is that the culture of kickbacks and sweeteners is so deeply rooted in our financial landscape that it will remain, even after commissions are formally banned.
How can this be? The reason is that financial salesmen are rewarded with special bonuses and extra payments which are not commissions but have a similar effect.
They win prizes or holidays. They are sent to conventions to enjoy themselves. All to encourage them to sell more of a particular product, a product they are very unlikely to understand themselves.
Hence, we can hope that the FSA's new regime will usher in a new era of trust and fairness, in which the customer comes first.
But we should still be on our guard.

1 comment:

  1. Don't know about other IFAs, but the advisers that I work for (in an IT role) definitely haven't received those kind of incentives in the 14 years that I've been here.