|Most Independent Financial Advisers
are not independent........
The great majority of IFAs are skilled, intelligent and honest.
We all certainly need financial advice. And the amount of money
involved is large, so it's certainly worth paying for it. So what's
The problem is.....
IFAs depend for their livlihood on selling product.
They are salesmen first
and advisers second.
So, they will be helpful, honest and wish you no harm.
But they operate within an incentive system that inevitably drives
them to sell you stuff that rewards them. For you, that means higher
costs and lower returns.
The regulators have attempted
to counter this by insisting that IFAs offer a menu of alternative
charging methods, ranging from all-fee to all-commission, from which
the client can chose. But this misses the point. Unless the
whole firm operates on a fee basis (and so makes no income
from product sales), the employees of that firm are still incentivised
to sell product. All the menu system has done is to introduce an
extra level of complication for the client, and maybe create the
illusion that by chosing to remunerate on a fee basis the client
is avoiding biased advice.
...and there are other pitfalls....
- Your IFA may be receiving introductory fees
from product providers as incentive to mention their products.
An investigation by the FSA, reported in a letter to product providers
in June 2004, noted "..... the contemplation of fees of up
to £1m [payable to an IFA] as condition for providers' products
being placed on the [IFA's] recommended list"
- He may have other undeclared financial relationships.
The same letter warned "similar introductory deals may be
structured around the provision of finance for [IFAs] for the
development of software or computer facilities"
- Like all professionals, he likes to make
things more complicated than they are.
It is a stupid regulatory failure that commission-based
advisers are allowed to call themselves 'independent', or even 'advisers'.
If they were called 'Financial Product Distributors', which is what
they are (and as suggested by the 2002 Sandler Report on retail
savings), we would all know where we stand.
If you want to buy product, by all means go to
an IFA. But it will pay you sometimes to get real
advice, for which you should expect to pay for the expensive
time of the skilled and experienced person who will provide it.
If you buy product you are paying anyway, but for the product provider's
sales and marketing effort, not for advice.