Record repayment for bad financial advice

cepheus

It seems unfair for genuine fee based Independent advisor's to be mixed up with commission based ones by the same 'Independent' title, since the latter cannot be really Independent. Its like mixing professional medicine with alternative. Surely this falls foul of the trade descriptions act?

Should commission based advisor's be allowed to call themselves Independent? Are not most commission based advisor's suspected of bending the products in favour of high commissions and this firm is the tip of the iceberg?

An independent financial advice business is being ordered to repay customers a record amount after a catalogue of failings

The FSA found that customers of Park Row Associates were at risk of receiving unsuitable advice about pensions, investments, bonds, mortgages, structured products and annuities

The City watchdog discovered a catalogue of errors between January 2007 and January 2009, including advisers giving advice based on the commission they would receive rather than whether this was suited to the customers' needs.

The firm then consistently failed to take action to rectify the problems despite the fact that concerns were highlighted to the firm on a number of occasions.

As a result, about 24,000 people could now be in line for redress - some of whom might never have realised that there was ever an issue with Park Row. They will now be contacted by an external examiner.

http://news.bbc.co.uk/1/hi/business/8534022.stm

Rollinghome

Fortunately it's all going to change if the FSA get their way. Under the "Retail Distribution Review" they intend an end to the practice of "independent" financial advisers being paid commission by the product providers to sell their over-priced products and will require a higher level of qualification than the very basic requirements needed now. IFAs will be required to be proper advisers rather than just commission based salesmen as now.

FSA - We launched the Retail Distribution Review (RDR) in June 2006 to address the many persistent problems we had observed in what is now, over 21 years of regulation of the retail investment market.

See details http://www.fsa.gov.uk/Pages/About/What/rdr/index.shtml
And an outline of the problem here: www.moneyweek.com/personal-finance/need-unbiased-advice-youll-be-lucky.aspx

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.[FONT=Verdana, arial, helvetica, sans-serif] [/FONT]

It's hoped to be fully implemented by 2013. Of course the dodgier ones insist there's nothing wrong and it should all carry on as it is. Their line is it's always "the others" at fault.


.

feesarefare

Rollinghome wrote: »

Fortunately it's all going to change if the FSA get their way. Under the "Retail Distribution Review" they intend an end to the practice of "independent" financial advisers being paid commission by the product providers to sell their over-priced products

What will change? they will just take their 5% commission as a "fee" instead.

Aegis

feesarefare wrote: »

What will change? they will just take their 5% commission as a "fee" instead.

Yep. The bad ones who give the whole industry a bad reputation will find ways to keep ripping off clients.

The rest of the industry will end up doing a whole load of extra qualifications and probably won't otherwise have to change much about how they do business. A commission of 5% with a 2.5% rebate will just become a flat 2.5% fee for setting up an account, and the 0.5% trail commission will just become a 0.5% recurring charge.

All in all, I think this is going to have a lot less of an effect than the FSA would hope.

VIGILANT22

Independant does not mean fee based only....it offers different ways of remuneration...

cepheus

My understanding is that they currently receive more commission from recommending certain products than others. So a flat fee should reduce any financial bias in their decision.

Are you saying the FSA is not recommending a flat fee and IFAs could smuggle in commissions under a different name?

dunstonh

My understanding is that they currently receive more commission from recommending certain products than others. So a flat fee should reduce any financial bias in their decision.

Correct. The move to a charge irrespective of product will make things cleaner. However, very many already work on that basis and a number of products already work on that basis.

Are you saying the FSA is not recommending a flat fee and IFAs could smuggle in commissions under a different name?

No. Strictly speaking the only differences are :
1 - fees have to be explicit and cannot be factored into the product over the long term.
2 - the adviser sets the fee, not the product provider.

So, lets say the commission on an investment now is equivalent to £1000, then post RDR, the adviser can set their fee to £1000. So, in that respect absolutely no difference in the level of remuneration.

What is expected is that wealthy consumers will be better off as the fees should have some sort of cap/maximum. Smaller transactions will be worse off as the fees will be higher than the commission option. Those in the middle will see little or no difference.

feesarefare

The RDR doesnt say anything about the level of fees or whether they should be "flat".

Many advisers are already charging "fees" which are a percentage of the amount invested. I dont know how that differs from a commission but I seem to be in a minority, perhaps Im just a bit thick?

Rollinghome

Aegis wrote: »

All in all, I think this is going to have a lot less of an effect than the FSA would hope.

Given the dodgy characters the industry that you work in attracts I'm sure you're right that many will do all they can to evade the intentions of the reforms. Already we have many who like to suggest they’re “fee-based” when they’re nothing of the sort and in fact continue to pocket the trail commission on top of a front-end fee.

With any luck the RDR should do at least three things. The first is to improve the level of expertise. Too many IFAs know a lot about selling and far less about investment. They understand the products that pay them commission and that's about all. No educational standards are required other than their basic school-level qualifications and the background of IFAs is overwhelmingly in sales.

H-Ls head IFA, Danny Cox, worked in the fruit and veg department of a Sainsburys supermarket before donning a pinstriped suit and becoming an IFA. More than a few would have been double-glazing salesmen and most in some form of direct sales before going into the trade.

Secondly, when the fees become explicitly paid by the client, he's likely to be far more discerning than now when the advice appears to be "free" but in reality is no more free advice than from a double-glazing or kitchen salesman. Instead of being employed by the product providers to sell their products on commission, the adviser will be paid by the client to give advice. The client will expect good value when he signs a cheque for good money, rather than it being taken surreptitiously from his investments.

Most importantly it should go some way to reduce commission bias. It’s absurd that most IFAs working for companies are employed just as other salesmen, either on a small salary plus commission, or on commission only, and yet are bizarrely expected to give objective advice that might reduce their earnings. Of course the IFAs at Park Row sold the products that maximised their commission; what would anyone expect?

At the moment the product providers pay IFAs most commission to sell their most profitable products. Often those are bad products. We saw that recently with the collapse of the Cru Arch funds. They were sold as “Cautious Managed” funds when they clearly were anything but that. They were able to sell them because they offered IFAs an especially generous initial commission and double the normal trail commission. https://www.theintelligentinvestor.co.uk/2009/04/premier-cru-or-vin-de-table-arch-cru.html

That of course is nothing new. While commission based IFAs do all they can to talk down low cost index trackers, hourly paid IFAs are often very much in favour of them. The difference is of course the commission. We hear a lot about the compound effect of investment but less about the effect of compound charges and commission.

Modern index trackers generally pay no initial commission and half the normal trail commission at best. Not the sort of deal that suits commission-based IFAs. They won’t be the answer for everyone but they should be honestly on offer. Nor is there currently any incentive to suggest more efficient investments such as ETFs and ITs that pay no commission which is to be addressed by the review.

What should follow from that is fund manager will have an incentive to improve and reduce their charges instead of relying on generous commission to “advisers” to sell their poor products. Charges for unit trusts in rip-off Britain are up to twice as much as their US equivalents. The UK investment industry won’t be able treat investors with contempt as the Consumer Association put it.

Yes of course there’ll be kicking and screaming from the industry and especially those who realise that just being a good salesman may not be good enough when the reforms come in. To succeed they may need to know a bit about investment too. The decent IFAs who can demonstrate that their advice is worth paying for already welcome the proposed reforms.

Rollinghome

feesarefare wrote: »

The RDR doesnt say anything about the level of fees or whether they should be "flat".

Many advisers are already charging "fees" which are a percentage of the amount invested. I dont know how that differs from a commission but I seem to be in a minority, perhaps Im just a bit thick?

It's a fee if they rebate ALL the commission, including trail commission back to the client, as some do. If not then it's just a clever way used by the dodgy ones of getting both a fee and commission.

The RDR intends to ban the product providers from paying any commission to advisers who are supposed to be working on behalf of the client.

Rollinghome

dunstonh wrote: »

Smaller transactions will be worse off as the fees will be higher than the commission option.

That was the line that commission base IFAs pushed very hard. Their main concern was with the effect on the less well-off. Could almost imagine the tears running down their cheeks.

This assumes that an adviser will put in as much effort when he expects to get only a small amount of commission as when he gets a large amount. The reality is that IFAs are currently not interested in anyone with only a small sum to invest. The first thing they ask before they see anyone is how much they have to invest. That won't change.

What will change is that the IFA will need to give genuinely unbiassed advice rather than being employed and remunerated by the investment industry to sell their products. They will need to act in the best interests of their clients instead.