Good advice stands alone

 

Imagine the following scenario.

Fred: Hello. I’m at a fork in the road. Can you advise me whether I should go left or right? Should I reverse? Or should I stay put?

Jane: Yes, we can advise you.

Fred: Great. How much will I pay you for your advice?

Jane: Well, if you go right, we will get paid £3,000. We get paid nothing for all the alternatives.

Fred: OK. Which way should I go?

Jane: You should definitely go to the right.

Fred might think long and hard about the advice he gets from Jane. Or he might spend very little time considering it at all, seeing a clear conflict of interest.

So why is there now so much confusion about the provision of financial advice? The issue confronting private clients when they engage with financial advisers is exactly the same as the scenario above.

The chance of Jane providing objective advice for Fred based on his specific needs is hamstrung by the pernicious influence of the remuneration structure.

Jane would say she has a business, not a charity. She has fully disclosed her commission (or fee) and what it is for. Fred can then make an informed decision about whether he engages Jane’s services. Fred agrees.

Great debate

After the recent overhaul of financial services following the Retail Distribution Review (RDR), the Solicitors Regulation Authority's decision to allow solicitors to refer clients to restricted financial advisers as well as those who are independent has stimulated significant debate.

Rather than being an outrageous volte face, this decision partly reflected the Financial Services Authority’s Orwellian insistence on using a definition of ‘independence’ that no longer precludes influence from a third party; astonishing but true.

Understandably, solicitors are concerned. They want to know what to do as they seek to improve outcomes for their clients and reduce risks to their own business when engaging with financial advisers.

Core concern

It is clear from the many conversations I’ve had that much of the regulatory focus is now on the independent or restricted status of a financial adviser. I believe this is a secondary issue – there is plenty of room in the new environment for good restricted advisers and, sadly, poor independent advisers – because it doesn’t get to the heart of the matter: the distinction between advice and product implementation.

Back to Fred and Jane. By bundling advice and product implementation together, Jane is committed – before she has even met Fred – to pushing the need for both parts. Without Fred implementing a specific ‘solution’, Jane doesn’t get paid; advice is devalued and relegated to a mere bureaucratic hurdle in a sales process.

Even after RDR, product implementation and review remains the primary profit centre for financial advisers. There is no inherent problem with this. It is only the bundled approach that, however transparent, doesn't align the interest of the advice-seeking client with the interest of the revenue-seeking adviser.

Many firms who operate this way may provide a valuable service and act responsibly, but they fail to grasp what Fred instinctively recognised: that good advice stands alone.

Majority verdict

I’ve discussed wealth management with more than 1,000 individuals and families. So, indulge me as I make four obvious statements:

1. Many people do not require a ‘solution’ for their financial circumstances; they are perfectly fine as they are.
2. Many who need a solution do not require a financial product.
3. Many who are advised to take action are able to execute the recommended transactions on their own.
4. Where a product-linked solution is required and the client wants expert help with implementation, that service needs to be provided and charged for separately from the advice.

We have undoubtedly been let down by institutions that partly reduce confusion and improve understanding of financial services. However, we must all take responsibility for educating ourselves about the fundamental importance of, what’s that word again? Oh yes, advice.
 

Steven Hennessy is a chartered financial planner and associate director at Myers Davison Ginger