Reality?

I was very pleased to read Natalie Holt’s article in Money Marketing, we need a better way to deal with bad advice. It deals with public perceptions of financial advisers and is uncompromising.

The reality of advice is lost every single time poor advice is given, every time an unsuitable unregulated investment is sold, and every time a firm is declared in default by the FSCS.

“The reality of advice” is an interesting phrase. Can advice be unreal? Or is Natalie saying that people stop feeling they are getting advice when they see their advisers closed down for selling dodgy products?

I guess “good advice” makes the concept of an “advice profession” a reality.

I don’t entirely buy that. I work in an area of financial advice (advice to trustees and employers about workplace pensions) which considers itself professional. We have rogue firms that deliver poor advice and we have individuals and even firms struck off by our professional body (the institute and faculty of actuaries) and our regulators.

By and large the profession is self-regulating, when bad practice is spotted , it is reported. This anonymous whistle-blowing is  taken very seriously and is used sparingly and not vindictively. Generally it works.

I see no comparable mechanism in retail financial advice. But there is no comparable body (to the IfOA) that all advisers subscribe to. The Law Society, the BMA, the ICAEW, professions have professional bodies that issue codes of best practice and dish out discipline where necessary.

Where Natalie’s argument falters, is in supposing the problem lies with FSCS. The Financial Services Compensation Scheme is a means of redress for customers that are ripped off, it is not a trade body with a code of best practice to which retail financial advisors sign up.

If FSCS became a member organisation, like the IFOA then I can see IFAs whistle-blowing to it , as actuaries whistle-blow to the IFoA. But for that two things need to happen.

1. Financial advisers need to be clear about what they are and where they are conflicted
2. There must be a clear process by which IFAs can whistle-blow on bad practice, not to gain commercial advantage but to prevent their profession being brought into disrepute.

Saying it like it is

Over the ten years I’ve been writing this blog, I have often written of bad practice. I complained about the unfairness of active member discounts, citing a particular case where bad practice would bring shame on workplace pensions.

More recently I have pointed the finger at vertically integrated master trusts, fiduciary management and the general trend among actuarial and employee benefit advisors to double up fund management fees (with little VfM).

Most recently , I am pointing out the dangers of “conditional pricing” of advice on transfers, where IFAs advise for free so long as they get wealth management fees.

What is consistent is the insidious trend among advisers (of whatever hue) to ignore conflict of interests and to tell it “how it isn’t”. Active member discounts were a way of cross-subsidising employer fees by charging them to deferred member pots. Vertically integrated master-trusts/fiduciary management and manager of managers are all ways of collecting advisory fees via the “ad-valorem” back-door. Conditional pricing is simply a way of taking commission from a SIPP instead of charging a fee.

If we want a profession that is trusted by the general public, then financial advisers (including investment consultants and actuaries pretending to be asset managers) must not just be clear about how they charge but make it clear they do not consider un-transparent charging structures acceptable.

The conflicts of interest created by making consultants shop-keepers , manufacturers as well as financial advisers are obvious. But they are never called.

Natalie points to the recent claim on FSCS from a collapsed firm, Central Investment Services, that had been selling unregulated investments which have proved worthless.

Here is just one of the comments in the article in her paper she is referring to;

He does what he does and then disappears, leaving customers in the lurch. There are three potential sources of redress: the PI insurance, the assets of the firm and the compensation scheme. (Richard Hobbs

This firm traded in the UK, it had the support of a reputable platform (Nucleus) in which it had a share-holding. There is nothing to suppose that there are not man other IFAs doing precisely the same.

It really is time that when the kind of behaviours that firms like Central Investment Services are discovered, they are stopped at source. If IFAs know of bad practice, they should have a way of reporting on it to their trade body (perhaps FSCS could become this), before a crisis develops.

In the meantime I will go on blogging about what good looks like, the evils occasioned by conflicts of interest and the necessity for bad practice to be exposed before it does the damage.

The message is certainly getting through. My highest read blog this year is on just such a theme. My recent blog on conditional pricing is in the top five (you can’t read it as the firm I am criticising are threatening legal sanctions). We all know this is important stuff, it is not enough to read about it, we really need to take action against the bad apples before they infect the barrel.

So I would add this blog as my comment to Natalie. The answer to the problem is not in more regulation, it is in good advisers refusing to tolerate bad practice. We need pre-emptive action as “a better way to deal with bad advice”.