The world of finance is becoming highly complex at a time when we are all being encouraged to take responsibility for our affairs. Consumers are left bewildered by the options. You feel like you need a PhD in financial services before you can choose a basic life policy. Few of us can ever hope to navigate a way through the maze without advice. Or would want to.
Yet fears are mounting that a report due later this month from consumer watchdog the Office of Fair Trading may price good quality advice out of the reach of all but the super-rich. Over the next fortnight, OFT director-general John Bridgeman will review the recommendations of his officials and decide whether the time for change has come.
In the not so dim and distant past, anyone could offer financial advice. One day a salesman could be selling cars or double glazing, and the next set up shop dealing in complicated investments. Not surprisingly, the industry did not always attract the most reputable characters, particularly as fat commissions made it an easy route to riches.
While markets were soaring, no one minded very much, because no matter how bad the advice, most customers were still better off with any pension, insurance or investment than without one. Then the 1987 stock market crash threw up some high-profile scandals, such as Barlow Clowes, and Levitt. Stringent regulations were introduced to control the quality of advisers, and to ensure they were properly trained and financially sound.
This new regime, called polarisation, essentially created two classes of advisers; company reps, who can only sell the policies and investments of the company for which they work, or independent advisers, who should pick the best option for you, out of all those on the market.
Which is the best for consumers? Independent advice obviously. But the problem is most of our biggest and reputable financial services organisations, such as banks, some insurers and former building societies, declined to offer it, because it is much more expensive to administer.
It was therefore left to smaller entrepreneurial firms, who were expected to wither on the vine. In the late 1980s, the OFT expressed grave concerns that the opportunities for high quality advice would reduce and consumers would suffer.
But they were wrong. It flourished, largely because after a long period of education, the public got the message that independent advice was their best option, not least because the policies and investments they offered tended to provide better value than those available through a company rep.
Both were still largely remunerated through commission, although in a minority of cases an IFA would charge a fee and return the commission to the client. And it is this question of commissions, which is central to the OFT's latest concerns. It doesn't believe any advice which relies on commission can ever be truly independent.
It also has doubts over the extent to which some advisers really do trawl through the entire market. Many simply draw up a panel of favourite companies they work with, effectively reducing them to what is termed a multi-tie operation. Consumers using such an advisory firm should be warned in advance that this is how it operates.
Common sense dictates that customers can only ever be sure they are receiving completely unbiased financial advice when they themselves sign the cheque for the service, effectively by paying a fee.
There is a case that the current regime would be more open and honest if advisers were split into three rather than two categories. Both extremes would remain as now, but in the middle we have a new group of multi-tied companies. These could offer a range of options, without conscientiously studying the entire market. This is what Mr Bridgeman must now decide.
The OFT report makes a case that these multi-ties could continue operating through commission, while the gold standard independents might be forced to charge a fee instead.
The problem is the public doesn't want to pay a fee, which is scarcely surprising, as fees typically cost between pounds 100 and pounds 150 per hour. If you have a significant lump sum to invest, then it's worth it. But most people are better off sticking with a commission deal, not least because if they don't like the advice they don't have to take it, and it won't have cost them anything. With a fee you pay, regardless.
Bryan Beeston, managing director of financial advisers, the Millfield Partnership fears independent advice would virtually disappear if a fees- only rule was introduced. He said: "We fully accept that the current regime is not perfect. Poor advice exists and some consumers do suffer. But the real test is whether truly independent advice would continue to be available at all. Consumers would suffer if the availability of advice were reduced further."
Willis National's spokeswoman Christine Ross added: "We've already seen it with the supermarkets. A few companies would end up controlling the entire market, and prices would rise."
This is a compelling argument, which Mr Bridgemen would do well to heed. It has taken a decade for the public to understand the current regime. For once it really is a case of "if it ain't broke don't fix it".Reuse content