POLES APART

Over the six months from December 2004 to the end of May 2005 the way we are sold investments, pensions, and other financial products is undergoing the biggest change since 1988. Some commentators say the change will destroy truly independent financial advice. Others believe it will give most customers more choice in the financial products that are sold to them. But one thing is certain. The banks and building societies with more than 13,500 High Street branches will come to dominate those sales. At the moment out of every £10 we spend on financial products about £6.50 goes through Independent Financial Advisers and just under £3 is sold direct by insurance companies or bank and building society branches (the remaining 50p worth is sold direct, over the phone or internet). In future, those figures could be reversed with more than half the money we spend on investments and pensions being taken on the High Street and as little as a third through IFAs.

To understand the new system we need to know how the old one worked. Before last December there were two sorts of qualified person who could sell us financial products. One group were called Independent Financial Advisers. They had to search the whole market to find us not just a good product but the very best one to meet our needs. The other sort was tied to one institution and could only sell its products. So the Man from the Pru could sell a Prudential pension but not one from Axa or Legal and General. You would never know if there was a better or cheaper product from a rival. These sales staff were called ‘tied agents’.

This clear split between two sorts of sales person – called ‘polarisation’ – was introduced in April 1988. It helped develop the new profession of IFAs - independent financial advisers – and enabled journalists to say to readers ‘always go to an IFA when you want financial advice’. It also opened up the market for investments and financial products to millions of people. And was partly responsible for the widespread mis-selling of many products – including pensions, mortgage endowments, and what are now called ‘precipice bonds’. Both kinds of adviser were guilty of mis-selling us things – though far more products were mis-sold by tied agents than by Independent Financial Advisers.

The complete separation of ‘independent’ and ‘tied’ advice blurred a bit over the years – some IFAs found ways to avoid searching absolutely the whole market and some banks extended their ‘tied’ range to include some products from one insurance company, but generally customers knew where they stood. Now this system is being scrapped and by the end of May the change will be complete.

Hybrid
Independent Financial Advisers and tied agents still exist and are much the same as they were. But in the middle there is now a hybrid ‘multi-tied’ agent. This cuckoo in the middle of the advice nest is expected to grow and squash the other two forms of financial advice, perhaps even pushing them right out. At one end the banks will generally stop being tied agents and do deals with big insurance companies. They might sell pensions from three companies, unit trusts from another four, and shares ISAs from two more. When customers visit their branch, sales staff can now offer a tempting range of financial products from well known names. The regulator, the Financial Services Authority, claims the new rules provide a better choice of financial products for the majority of people whose first port of call is their local bank or building society.

But those who currently look for independent advice may find their choice more limited because many independent advisors are giving up their independent status becoming ‘multi-tied’. They are doing deals with a few big name companies to sell their products and the insurance companies may pay for being on their ‘panel’ of preferred suppliers by offering them more profit on sales. The advisers also avoid the expense of making sure the products they recommend really are the best from across the whole market – it is much cheaper to be ‘multi-tied’ than independent. Those who remain genuine IFAs will have to offer customers the option of paying a fee rather than earning commission. And there is a fear that many IFAs will only be interested in dealing with wealthy clients who are willing – and able – to pay those fees.

IFAs who become multi-tied agents cannot call themselves ‘independent’. But they can use the term ‘financial adviser’ as indeed can every other person who is allowed to sell financial products. The distinction between ‘financial advisers’ who sell a range of products from half a dozen well known companies and ‘independent financial advisers’ who may well end up recommending the same or similar products is a hard one for customers to make. But there is a real risk that by using a multi-tied agent they will not be sold the best or cheapest product for their needs.

Unregistered
As if this was not enough, from April unqualified and unregistered people will also be able to sell some sorts of investment products. The Government is approving a new range of simple pensions, medium term investments (which last from five to ten years), and an investment plan for children (known as the Child Trust Fund – see ‘Children to get Government cash windfall’, Saga Magazine August 2004 p132). They will all be known as ‘stakeholder’ products, will not include anything very risky, and charges will be no more than 1.5 per cent a year of the money you have invested. These products are seen as low risk – though anything invested on the stock market carries some risk and, after the charges have been deducted, may not produce as good a return as a simple cash deposit account. Nevertheless the people who sell them can be unqualified. Although the company they work for will be regulated by the FSA, the individual sales person will not be registered as other financial advisers are. In each category of tied, multi-tied and independent there will be both qualified and unqualified people selling us products. That is six different sorts of salesperson and all called ‘financial advisers’.

Key Facts
The Financial Services Authority, one of whose jobs is the protection of consumers, says people will not be confused by the wide range of people calling themselves ‘financial advisers’ because in future, every customer will be given two ‘Key Facts’ documents. One sets out the service offered and whether the adviser sells products from ‘the whole market’ (ie they are independent), from ‘a limited range of companies’ (multi-tied) or from a ‘single group of companies’ (tied agents). If the sales person is unqualified and can only sell the ‘stakeholder’ products it will also explain that – though it will not use the words ‘unqualified’ or ‘unregistered’. Instead it will say they offer ‘basic advice on a limited range of stakeholder products’.

A second ‘Key Facts’ document will set out the cost of the advice from the company and compare it with the average market rate. This information may surprise many people. It reveals for the first time to the public that there are two sorts of commission – there is the initial commission on the sale itself. And then there is continuing commission every year that the product continues. That means for example that if you buy life assurance, at least the whole first year’s premiums go to the sales person as initial commission and then after four years he or she will also be paid 2.5 per cent of all the premiums you pay for the rest of your life. Similarly, if you put money into a unit trust, every time you invest another hundred pounds, £5.50 will go straight to the person who sold it to you.

The document also reveals that if you pay a fee for your financial advice, it will cost you between £100 and £200 an hour. If you do pay a fee, then any commission should be paid back to you, but make sure the refund includes all the continuing commission as well as the initial commission.

In the past, journalists always told their readers to get independent financial advice and have nothing to do with banks who could only sell a limited range of products. Now, even though banks can sell a wider range they will not cover the whole of the market so it is still better to get independent financial advice. The problem is that under the new regime true independent advice will be harder to find, especially if you have relatively little money to invest. An unqualified multi-tied adviser offering a narrow range of products from a few companies will not be easy to distinguish from a genuine qualified IFA. So read the Key Facts document carefully to check that your adviser offers products from the whole market. And be aware that if he or she can only sell you a limited range of stakeholder products, that means they are unqualified and are not individually registered with the FSA. The dilemma is that you may pay less for their advice. If a stakeholder product is right for you, there is little point in demanding a qualified and registered adviser if it will cost you more and you will end up with the same product.

More information
Details of the new regime and the cost of advice at www.fsa.gov.uk/consumer
Find a local IFA to suit your needs at www.unbiased.co.uk

February 2005

e-mail Paul Lewis on paul@paullewis.co.uk