James Daley: What price impartial financial advice?
Saturday 16 June 2007
Finding someone that you can trust when you're buying financial products always presents consumers with a paradox. No one likes paying £100 or more per hour upfront for advice. Yet using an adviser who gets paid by commission always leaves you wondering whether you've been sold the best product for your needs (rather than the one that has the best kickback for the salesman).
Commission bias is undoubtedly still a big problem in the UK. When I used to report on the annual results of big life-insurance companies, the chief executives would freely admit that they can manipulate the amount of pensions or protection products they sell by simply adjusting the amount of commission that they pay to financial advisers. And while there are surely plenty of worthy and honest advisers out there – who always sell products with their clients' best interests in mind, regardless of commission levels – there are still far too many who are primarily focused on their own well-being.
The majority fall somewhere in the middle – doing the best they can for their clients, while keeping their families fed. Ultimately, it's an unenviable position to be in. Even if the adviser wants to do the very best for their client, there are some products that don't pay commission at all – which means the adviser can't afford to sell them.
A few years ago, the Financial Services Authority tried to address this problem by forcing all independent financial advisers (IFAs) to offer their clients the option of paying by either commission or fees. But very few consumers like forking out upfront – and the majority still opt for the commission route.
In his annual report, published today, John Howard – chairman of the Financial Services Consumer Panel – has urged the regulator to have another go at making the market a cleaner place. And if it rises to the challenge, the shake-up needs to be much more radical than its first attempt. Surely there must be a way of allowing all advisers to be remunerated on a fee-basis, without forcing consumers to pay upfront.
For example, if you were to go out and buy an investment product, your adviser could tell you the price of the advice, and then get the insurance or fund- management company to pay him that sum out of your investment policy over a number of years. This would replace the income that advisers currently get from "trail commission", but would reassure consumers that the advice they were receiving was impartial.
IFAs are not the only group in need of a shake-up. Bank salesmen are often paid bonuses depending on how many products they sell. However, in many cases, banks offer only a very narrow range of products, meaning that consumers are often not sold anything like the best product for their need.
And financial comparison websites – which are becoming one of the most common ways of shopping around for financial products – are also in for a rethink if they are to retain consumers' trust.
As you'll read on page 4 of this issue of Save & Spend, most comparison sites have lucrative commercial agreements with financial providers, which garner those providers a prime billing. Some sites are much better than others at pointing out with which providers they have a commercial agreement, and with which they don't.
If these sort of backhanders are to remain in place, comparison sites will need to make it crystal clear just who is paying them and who is not. Many consumers are still completely unaware that comparison sites – all of which boast about their independence and impartiality – have commercial agreements.
Ultimately, advisers, banks and comparison sites all deserve the right to make money, and consumers deserve the right to fair treatment. These two goals are not incompatible, but the current system is ensuring that many consumers are still being taken advantage of.
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