Integrity pays off when you are paying for advice

By David Wallace

By David Wallace

9 August 2000

Sixteen years ago, my business partner and I set out to discover whether we could confound the sceptics by running a commercially successful firm of independent financial advisers on the basis of charging fees for advice rather than (as most IFAs do) accepting commission from product providers.

Sixteen years later, we are still in business, and our client base, I am pleased to say, has grown substantially. Strange as it may seem, the greatest threat to our business has never been a lack of clients willing to pay fees for advice. Nor has it been the competition from other advisers who choose to accept commission rather than fees.

The main threat we face is the ever-increasing burden of Financial Services Act legislation. As a result, we now devote almost as much time to complying with the strict letter of the law as we do in dealing with clients. That is a sad comment on some ill-conceived legislation.

Less time dealing with clients means less time generating fee income. When you combine that with greatly increased compliance costs, it's no wonder financial advisers of all types are much thinner on the ground than they once were.

From a financial consumer's point of view, financial services legislation has unfortunately done little to help protect investors from the worst excesses of the charlatans. Yet it has done a lot to prevent good advisers from providing a firstclass service to clients who are willing and able to make decisions for themselves.

The financial services industry seems to have been hit by one financial scandal after another, the latest being the accusations of mis-selling of endowment products in connection with mortgages, this coming hard on the heels of the pension mis-selling débâcle.

One positive result of these scandals is that there is now clear evidence that individuals seeking advice realise it is naïve to expect unbiased advice where commission is involved. I am sure some commission-based advisers give better advice than fee-based advisers, but focusing on the issue of quality of advice is to miss the point.

The issue of fee versus commission-based advice should focus on one question, which is: "In what capacity is the adviser acting?" A good fee-based adviser should be the agent of the client, and someone living entirely on commission is an agent of product providers, insurance companies, unit trust groups, banks or building societies.

In effect, anyone going to a fee-based adviser wants to take the financial risk (ie commission) out of the equation. The basic principle should be that any genuinely independent adviser is indifferent whether the client accepts or rejects his advice. As things stand, those who live on commission have a powerful vested interest in seeing that a client accepts some or all of the advice given. I believe that has been a major factor in the mis-selling of financial products.

The financial services industry is creative. There is never a shortage of new products. Unfortunately, product providers still view all financial advisers as a homogenous group. We are regularly asked, for example, if we want marketing literature for new products overprinted with our company name as part of the provider's marketing campaign.

In this respect, there is no doubt that the industry has been slow to recognise that a change is taking place. We often detect a note of incredulity in the caller's voice when we tell them that, as fee-based advisers, we do not market products to clients. We merely provide advice and leave it to the client to decide whether he/she will act on that.

Four years ago, in an article in The Independent, Andreas Whittam Smith proffered excellent advice on this subject. It is worth reiterating some of the key points he made:

First, you are there to be fleeced. Under this heading, he likened financial users to sheep to which the financial institutions will regularly take shears.

Second, you are on your own. Mr Whittam Smith said that in a perfectly transparent market, one would pay a broker or other qualified adviser to find the most suitable investment product at the best price. Unfortunately, the reality of the situation is that the majority of advisers are not working for consumers, but are in business for the convenience of product providers.

Third, trust nobody. A healthy scepticism is an essential part of every consumer's early warning system.

Finally, be more cynical about the City than the stock market. In the long term, share prices go up, but despite what their marketing literature may suggest, few fund managers consistently outperform the market. Many products offer little or no added value.

Our work ethic has always been relatively simple. Before we make any recommendations, we try to put ourselves in the client's position and ask what would we do in the client's circumstances? In making that judgement, we take into account the fact that each client's risk tolerance is different from our own.

With all due respect to our many friends in financial services, knowing what I know from the inside, and because I also know something about human nature, I have no trouble in saying to potential clients: only go to a fee-based adviser. It is unrealistic to expect any adviser to give totally unbiased financial advice if they have a financially vested interest in the selection process.

How to choose from the fee-based advisers? Before anything else, I would look for integrity. Unfortunately, looking at a letterhead or reading the initials after someone's name cannot identify that quality. Nor can it even be easily established in a face-to-face interview. You have to dig deep by asking other people in the same industry for the names of firms or individuals they believe have that quality, or at least place it highest in their priorities. Ask friends, relations, and those in your own social circle who they use, why they use that firm and for how long they have been taking advice from that source.

Until recently I was beginning to think integrity was an old-fashioned concept that few believed in, let alone used. I was uplifted to read in an interview in the publication Intelligent Investor that Charlie Ellis, the founder of Greenwich Associates, and one of America's most respected investment consultants, placed integrity top of his list of factors in selecting a fund manager to manage his money. The same goes for choosing someone to give you advice on a wide range of financial matters.

You should expect to pay a good financial adviser for giving you the benefit of his advice and experience and he or she should have no interest in whether you follow that advice. If you then choose to act on any of the advice that should be a separate matter.

If you take this to its logical conclusion, there will be circumstances where you pay for advice and are then told your financial affairs are in such good order that there is nothing further you need to do.

That would not be money wasted, because you have paid for a financial health check and come away with the reassurance that your financial affairs are in tip-top condition.

The writer is the founder of Portfolio and Pension Management, an independent fee-based financial adviser in Scotland.