Will we ever have a financial advice industry free from spivs, chancers and incompetents? My view has switched from hope to despair in less than two days.
On Monday, I had lunch with Andrew Fisher, chief executive of fee-based wealth managers Towry, vocal champion of the Financial Services Authority’s Retail Distribution Review (RDR) – and, as such, bête noire of questionably-motivated commission-based “independent” financial advisers (IFAs). He reiterated his confidence that the reform of financial advice to be implemented in 2013 will result in the consolidation of hundreds of IFA businesses, the retraining of advisers, the achievement of higher professional qualifications and the end of undisclosed payments from fund managers to the platforms selling their products. Of course, he would say all that, as it is pretty much the business plan he’s now touting around the City, ahead of Towry’s estimated £500m flotation. He pointed out that Towry had already grown from 45 to 750 qualified advisers, with up to three firms a week offering to sell up and join his firm. For a fleeting moment, I believed a new gold standard of financial advice was genuinely attainable. And I was only drinking mineral water.
Early on Tuesday morning, I read a statement from the Financial Services Authority (FSA) about one of the largest distributors of retail savings products in the UK – and, as such, a business full of highly motivated (if oxymoronic) “sales advisers”. It said Barclays Bank was guilty of “advice failings” that included not ensuring Aviva’s “Cautious Income” and “Balanced Income” funds were suitable for customers; not giving adequate training to sales staff; and not disclosing the risks of the funds it was selling.
Why would they bother with all that, when this business brought in £692m and the FSA has only ordered £59m in redress for customers, plus a £7.7m fine? The FSA found that 12,331 people had been advised to buy the funds, 1,730 complained about the advice, and another 6,477 customers’ advice required “further consideration”. I nearly choked on my coffee.
Later on Tuesday, I had lunch with Richard Saunders, chief executive of the Investment Managers Association (IMA), figurehead of the fund management industry and, as such, motivated to engender confidence in fund sales. He acknowledged the problem of selling funds called “cautious”, admitting that they can have up to 60 per cent exposure to equities, but reminding me of an IMA committee’s ongoing review of the “Cautious Managed” sector name – as well as “Balanced Managed”, “Active Managed” and “Absolute Return”. It was right that they do all of that, he said, probably because those funds represent business worth £18bn, £22bn, £7bn and £15bn respectively. He explained that there were 12 people on the committee who were not to be hurried. I could have done with more than a glass of water.
How much longer can this toxic combination of non-independent advice on mendaciously named funds continue?
To be fair to the FSA, its RDR proposals will create a truly independent, non-commission-based IFA sector within two years – and it confirmed this week that retail investment advisers will need to hold a Statement of Professional Standing by January 2013, telling customers they subscribe to a code of ethics, are fully qualified, and have kept their knowledge up to date.
To be fair to Barclays, its own policing of sales advisers identified potentially unsuitable sales as early as June 2008, and it has already paid out £17m in compensation.
And to be fair to the IMA, it has accepted the inadequacy of many current fund names and definitions – and is trying to speed up its review. “Message received” was what Richard Saunders said this week.
But what about a fair outcome for anyone foolish enough to wander into a bank and say “I’d like to invest some money”?
Andrew Fisher believes the RDR will eradicate this problem. When I spoke to him about Barclays later in the week, he was still confident in the future. “The RDR gets us a long way down the road,” he said. “In its requirement for advice to be given, it would capture this problem. You can’t sell products like this and comply with ‘Treating Customers Fairly’.”
Oh really? What if there’s a bank at the far end of the road that still wants to give its staff financial incentives to sell certain products after 2013? Can they still do it? Even Fisher had to admit: “The RDR doesn’t prohibit it . . . It allows variability of payment.” For which read bias, inappropriate advice, fines and more failings.
This is the gaping hole in the RDR proposals, a loophole through which the spivs will continue to slip. Until it is completely closed, by banning all commissions and sales incentives, it doesn’t matter what the funds or the “advisers” are called – although I can think of a few more names for them.