I hadn’t realised that a lot of IFAs read let alone like my blog . A fellow called IFAblogger (twittername) asked me yesterday to a web-seminar he was giving on blogging. To my surprise  he gave www.henrytapper.com as an example of how an IFA should blog!

It might sound a little ungrateful not to sing IFA’s praises but blogs should be balanced and I’ll try here to give a balanced view of how we find them as they touch upon my work and the work of my clients.

IFAs – (Independent Financial Advisers) are a contradiction in terms (oxymorons). To be independent as Paul Bradshaw (pictured) keeps pointing out they would have to know every product on the market and recommend without bias. The primary systemic bias in financial markets is personal gain aka “the commission rate”.

I started my life as an IFA and had a scripted presentation whose first question went

The kinds of people I advise fall into two categories, those who have money and want to make the most of it, and those who don’t but want to – now which category do you fall into.

Today, this is known as market segmentation, then it was known as the “either/or” close since I was either going to make money from your wealth or your aspiration to wealth!

To this day, IFAs still divide into two camps, distinguished by the way they make their money.

Those who concentrate on wealthy people earn trail commissions, essentially a tiny slice of a large amount of wealth usually held on a platform managed by an insurer or a custodian. These IFAs are called wealth managers effectively they are fund managers who know how to talk to their customers.

Those who advise on an aspirational basis used to be rewarded not by trail commission but by initial or back-end loaded commission. These commissions are based on the anticipated amount accumulated in a savings plan or the sum of the premiums paid into a contract of pure insurance (a plan that only pays out on a specified event like death or critical illness).

I say “used to be” because the practice of rewarding someone on the basis of the aspirational behaviour of customers is now frowned on. Unfortunately, while a savings plan (pension, endowment or pure protection) may have been designed to last ten or more years, most people gave up on their plans early. Because a commission had been paid on the anticipated payment of premiums over much longer, the insurance company would deduct a penalty from what had been paid to meet the cost of the commission.

This kind of thing is frowned upon because it has led to public disillusionment. People say this wasn’t explained to them at outset and IFAs say we did explain it but not very hard (why should they) and the result of all this is embarrassed Regulators, the Retail Distribution Review and a supposedly more open means of charging for advice.

My firm , First Actuarial is not an IFA as we don’t give personal advice, writing about and introducing advisers is about as close as we get! As institutional advisers (eg we advise companies and the trustees of their pension funds) we don’t have any trouble charging fees for what we do and we don’t take trail or upfront commissions. It doesn’t make us saints but it does at least divorce us from one set of issues concerning which product to recommend. A cynic would say that as we “sell our time” we simply overcharge out hourly rates or invent work for ourselves (Paul Bradshaw would tease us on that!).

We used to see a clear divide between IFAs and EBCs (Employee Benefit Advisers). EBCs were paid by companies by fees (and often were part of actuarial firms like ours), IFAs were paid for by employees and tended not to be seen at work.

The change in the pensions landscape from Defined Benefit – where fees were paid by employers (via trustees) to DC where members pick up the costs from charges on their pension pots, has opened the door for both types of IFAs to make money in the workplace. Unfortunately some of the IFAs like kids in the sweetshop, simply went crazy, charging as if they had all the costs of dealing with individual customers when they had their clien’s staff queueing in the aisles making no brainer decisions (well would you turn down a 10% pay rise?).

So the Regulators have taken a long hard look at how advice is being charged for when delivered though Group Personal Pensions and other products that started out as individual savings plans and are now sold as company pension schemes.

The Government have been told for many years that people trust their employers to protect them from unscrupulously sold products. Statistics have been produced to show that people will buy things in the workplace they wouldn’t buy from a high-street IFA. People assume that employers will do a job of work selecting the IFA who delivers such products and generally they do. The days of deals done on the golf-course are fading and instead IFAs are having to behave in a more professional and open way – especially in the light of the RDR.

That said – and here I may offend some of the IFAs (and maybe Mr IFAblogger himself), I am not convinced that IFAs have properly learned how to behave at work. The standards of behaviour are variable and the standards of procurement and monitoring of the service IFAs give within the workplace is equally variable. Employers do not always have the experience to spot dodgy practices and occasionally they are even complicit in those practices.

For that reason a warning should be placed in the workplace “Be aware – IFAs at work!”. Ultimately it is the role of the employee to make sure that what’s been delivered whether it is advice on pensions, shareplans, corporate ISAs, annuities or just general financial advice is delivered to a high standard.

However, employees trust their employers and the representatives they have in the workplace  -unions, works councils, trustees, personnel or HR departments to protect them from unscrupulous practices.

In order for employers to get value from their employee benefit plans they had better be absolutely sure that they are delivered by advisers that need carry no wealth warning!

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