How Well Do IFAs Serve the
Public? Initial Disclosure I will start with the regulatory stuff and my initial
disclosure document. Although I do present
How Well Do IFAs Serve the Public?
I will start with the regulatory stuff and my initial disclosure document. Although I do presentMoney Box on Radio 4, Saturdays at noon, as it says in the conference programme, I am not here as presenter of Money Box; I am here as a freelance financial journalist. My terms of business: my name is Paul Lewis. I am not a representative of the BBC. I bring opinions and information from the whole of the market. My panel, which I review regularly, includes Saga Magazine, Reader’s Digest, The Daily Telegraph, Help the Aged, Age Concern, etc. If more appropriate outlets appear, I will sell to them too. At the end of the speech I will be paid a fee which will represent a reduction in yield of less than 5% on your ticket price. The opinions about financial advisers can go down as well as up.
I will start with one item of news. The big news is of course the marriage of Charles and Camilla, a civil wedding – not much evidence of that at the moment - but at least the Attorney General said the marriage will be lawful, as long as Charles does not take Camilla with the words, ‘one does’. I believe his advice was influenced by the fact that the couple are unlikely to have children. He studied the intelligence, as he has in previous cases, and found no evidence of a weapon of mass creation.
I will keep it clean, because I know we have a mixed audience: independents and multi-tied – or, as I believe you are all now called, ‘retail intermediaries’. Where did that one come from? Before depolarisation it was easy: there was tied and there was independent. Bad/good; it was that simple. Since depolarisation we have got tied, multi-tied and independent, and from April they will be sliced the other way as well. In each category there will be one group who are qualified and individually regulated and another group who are unqualified and not individually regulated. We will have tied qualified, unqualified multi-tied, tied unqualified, qualified independent, independent unqualified and qualified multi-tied – that is simplification for you! ‘I went to see someone about my pension. He said he was independent qualified, but I suspect he was multi-tied unqualified really.’ It is not going to happen, is it? People will not say that.
So what should we call them? The answer is you will all be called financial advisers except one group will be called independent. Five distinct groups will all be called financial advisers, ranging from unqualified beginners who can only sell me a Sandler product to some guy who has been in the business 15 years and can sell anything from any company in the world. In fact, it is even worse than that. I am told the FSA does not regulate what you are called apart from the word ‘independent’ so as long as it is fair and not misleading, you can actually call yourselves whatever you like. One thing I want to talk about today is that the name ‘financial adviser’ can sometimes fail the fair and not misleading test. First, let me give you some evidence about how well independent financial advisers serve the public.
Journalists as Promoters of Independent Financial Advice
I am sure many of you feel that journalists are very unfair critics of your industry. In fact, journalists spend a lot of time promoting independent financial advice. Whenever we write or broadcast about a financial product, whether it is a pension, investing in a unit trust or putting your money into a stock market-linked bond, we always finish by saying, ‘get advice from an independent financial adviser’. In that sense, financial journalism has been at the heart of promoting independent financial advice and its importance because, funnily enough, people believe us. I say ‘funnily enough’ because people generally put journalists at the bottom of the list of who they trust. Doctors are at the top, with nine out of 10; with police it is about two out of three; civil servants are about one in two; trade union officials are about one in three. And then we come to the bottom-feeders: with politicians it is one in five and yes, down there with politicians in last place are journalists, as just 18% of the population trust us to tell to truth.
I could not find a survey that included financial advisers but here is the strange thing: when Mori asked people where they got information and advice on financial products, using ISAs as a typical example, they answered:
Nearly a third of people turn to newspapers, to journalists – the people they normally do not trust – to give them advice about financial products. Having been a financial journalist for nearly 20 years, I find that our bit of the profession is trusted; we are expected to get things right. I did get a letter from a reader of Saga Magazine: ‘Dear Sir, your pension issue did not say the truth and you pussy-footed around. People will not save because of governments that cannot tell the truth, the Prime Minister lies and spins, pension companies cheat, bosses swindle and we are taxed again on what we work for and save. I hope you get it right next time. Tell the truth.’ I get lots of letters like that, as I am sure you do.
How Well do IFAs Serve the Public – the Evidence
About two years ago on Money Box we decided we would find out how well IFAs serve the public. We went mystery shopping. We had a customer, who was somebody from the department. He was in his 50s, he was working and he was not badly off. He wants to retire in about five years and he has just inherited £76,000 from his dear old mum. He went to speak to 10 tied agents and 10 IFAs, to see what they said.
There were three things to watch. First, our chap was a higher-rate taxpayer. His wife did not work. Would that be discovered so that money could be put in her name to save the tax? Second, he had a mortgage of £32,000. Would the advisers find out about that? If so, would they discuss with him paying that off first, before investing the rest of the money? Third, how would they assess what you like to call his ‘attitude to risk’? What would they recommend as a result of that?
The exercise was supervised by three people: Nick Bamford, who was then Chair of the Society of Financial Advisers (SOFA); Danby Block, an ex-IFA who produces training material for financial advisers; and Teresa Fritz from the Consumers’ Association. I chaired our discussions. All of these interviews were secretly recorded. Before you go, ‘Oh that BBC’, we have very strict rules about this. It is perfectly legitimate for research of this kind. We never identified the people who were recorded and we used clips in such a way that the people could not be identified. We also transcribed every interview that was done between the mystery shopper and the advisers. The panel of judges went through the transcripts and had the tapes available to listen to. As you can imagine, it was quite a long process with 20 interviews. If we did it now, we would need 60 interviews – simplification for you.
Sadly, we only got eight IFA interviews because one of them did not return calls at all and another said our man should go to the bank, which I thought was probably not the best way to make a living. All of the eight IFAs asked about debt, which was a good point, but only two of them actually said to pay off the mortgage. They were the two who had a reasonable discussion about it. Two of them specifically said not to pay off the mortgage. One said, ‘No, if you want to buy a car you borrow the money to do that, do not use this money.’ Only two suggested using his wife’s tax allowance to maximise the return on investments or savings.
As for risk, most classed him as low-to-medium because he had been told to say, if asked, ‘I would be very upset if I lost my mum’s money.’ Having put him as low-to-medium, there were then only two things offered: one was shares, or ‘equities’ as you like to call them, and the other was corporate bonds. As Nick Bamford of SOFA said, it was primarily a mixture of those two. It seemed as though they were not relating the selection of assets back to the definition of risk they had established with the client.
Only one adviser out of eight was judged to have explained clearly what shares, corporate bonds and gilts were. On the other hand, one adviser described his own boss as, ‘He is a very arrogant bastard, to be honest with you – people do not like him.’ On his desk, in clear view of our secret shopper, were folders from other clients with their portfolios and the values clearly on display. Something needs to be chased up there, I think.
The results were worrying: not discussing the mortgage fully, not using tax allowances, not putting enough into cash in almost every case, and not really getting down to his attitude to risk, which was very clearly that he did not want to lose his mum’s money. That may be a stupid thing to say when you are going to invest, but that is what he wanted. Teresa Fritz was very disappointed. She said, ‘I am used to seeing somebody who will come out of the benchmark. You will say, "Hooray, someone out there is doing it properly." I waited but I am sorry, I did not find it.’ Nick Bamford of SOFA said, ‘I would be mortified if any of the advisers in my firm behaved in the way we have seen.’ Danby Block said, ‘A number of very important opportunities were lost; it was not mis-selling, but it was not good advice.’
We selected the IFAs at random from the Yellow Pages. It is not a scientific sample but in that sense they were typical High Street IFAs. They were the people you would get if you followed the advice in the newspaper or on the radio to get advice from an IFA: open the Yellow Pages or phone the helpline, get your local list and go see one of them.
Tied Agents’ Advice
The only consolation for most of you, I suppose, is that the tied agents did even worse. One said, and this is a direct quote, ‘Well, in the low-risk category we have our corporate bond fund. That is the one that invests in cash, fixed interest, things like that – basically with full protection of your capital.’ I will not tell you which High Street bank she worked for. If you want to hear the programme or read the transcript, it is on our website: bbc.co.uk/moneybox. If you put ‘price of advice’ in inverted commas, it will take you straight to it.
As I say, perhaps these were not typical. We do not know whether they were typical, but they did not serve the public well. It was disappointing and it genuinely surprised us all. Even cynics about the industry like Teresa Fritz and I were surprised. The people from the industry itself were extremely surprised and disappointed. I do think there are certain systematic ways in which IFAs do not serve the public that well. I will outline two or three of them.
Saving and Investing
Saving and investing are not the same thing but they are frequently confused, and not just by advisers. Ask HM Treasury the difference and it will call a shares-based ISA a savings account – it is not! In my view there is a very simple difference between saving and investing. If you save, the money stays yours. If you invest, it belongs to someone else. You have the investment but they have your money.
Suppose you have £500. You go to the bank and put it into a savings account. The £500 is yours; you have lent it to the bank. A year later you need it back. You go to the bank, take it out and they have added £20. They take off £4 for Gordon and leave you with £16 – and you have done no work. Magic!
Alternatively, you invest it. You go to Mr Oldenshaw’s antique shop and see a really nice chair for £550. You beat him down and hand over £500 in 50 crisp tenners, he gives you the chair. You take it home and sit on it for a year. A year later you need the money back. You cannot take the chair to the bank to get your £500 – you take it back to Mr Oldenshaw. He really loved that chair and told you how rare such a chair was, especially in that condition. But now he says, ‘I am sorry, the market for brown chairs has really dried up. The most I can give you is £200 and that is cutting my own throat.’ Loss: £300. That is the difference between saving and investing.
Many people think that because many things called investments involve money, like shares, bonds, gilts and so on, that somehow the money is still theirs. It is not. It is just like buying a chair. The money is someone else’s; the investment is yours. To get your money back someone has to buy it from you at the right price when you want it. That is very rarely explained to people. I do not know many financial advisers, except of course everyone in this room, who makes that clear distinction about saving and investing. If you save, it is yours. If you invest, you may not get your money back.
That brings us to risk. To me, risk simply means there can be a happy ending or a sad ending. However, I still hear financial advisers say, and I quote, ‘Well, normally risk provides reward, so over the longer period of time you would expect the stock market, which obviously is high risk, to provide you the highest returns.’ That is a direct quote from a well-known IFA on Radio 4 this month: risk provides reward. No, it does not! Risk means you can lose your money. Assessing customers’ attitude to risk is not done well because that simple explanation is not given. Most people do not have a clue:
‘What is your attitude to risk?’
‘Well, I do the Lottery, I like a flutter and I take a chance now and then,’
‘Okay then, I will put you down as medium but erring on the adventurous side,’
Here is how I would assess it. You have got £1,000. You follow my advice and invest in this product. In a year’s time it is worth £600. How do you feel? ‘Terrible. I worked hard for that money; I did not want it lost to someone else.’ That is a person who needs a savings account.
Another person might be quite happy: ‘I knew I could lose but I also knew there was a chance I could make more than I could in the savings account. It was a bet, I lost. Some you win, some you lose,’ – the perfect stock market investor.
A third person might be a bit upset: ‘I was told it was a risk but I did not really expect to lose money.’ You do not expect to lose money, do you? I think that is the majority of the population, because they have not got it. Risk means you can lose your money, but if you do not explain that clearly and it does not turn out well, they get upset and complain.
As I said, there is a happy and a sad ending with risk. We have had the sad ending, with the chair example, but there is a happy one. You take it to Chair Style, a specialist dealer in old single chairs. Ms Carver takes one look at it and her eyes light up, as she has got just the customer who needs your chair to make a nice mixed set of six. After some bargaining you settle on £600. She writes you a cheque and it does not bounce: what a great investment! I took a bit of risk but I got my reward: 20% growth in a year.
Risk goes both ways. Put it in a bank and there is no risk. You know you will make a small amount of money – very small in a current account with the High Street banks, but in a savings account. Buy a chair and there is a chance you will make a lot more money, but there is also a chance you will lose money. That is what risk means. It is the downside, the fact you are gambling the chance of making more money against the chance of losing some or, in exceptional cases, all the money you have invested.
Accounting for Inflation
As I am saying this, I am sure some of you will be thinking, ‘that is bollocks’ – sorry, I told you I was not representing Radio 4, did I not? ‘That is nonsense. There is risk in putting your money in the bank. In 10 years’ time it may not have kept up with inflation; you will have less than when you started. I am sorry to tell you, this is simply a mistake. It is a very common one and I heard it recently from someone who runs a major financial services company. Honestly, he should know better. I was interviewing him about the risk of putting money in shares and he said, and I paraphrase, ‘The real risk is putting it in a cash savings account. 10 years later it is worth less than what you put in, because of inflation. That is the really risky option.’ Of course there is the possibility that inflation will have exceeded the return on deposit accounts. But over that period of time you have to discount for inflation wherever you invest your money. Whether you invest it in a deposit account or in shares, gilts, bonds or national savings, inflation will still have its eroding effect on what you get out at the end.
In my view, it is sloppy thinking. It is to try to make people feel that deposit accounts carry some sort of risk, which is the same as the risk attached to share-based investment. It is not true. It is like the word ‘fat’, which can mean a food ingredient and it can mean obese. People somehow believe that if you eat fat, you will get fat. No! If you eat too much, you will get fat. It does not really matter what it is.
How Long is Long Term?
The other mantra you will hear is, ‘Stock market investments are for the long term.’ What is long term? A little phrase is popping into your minds now, what you say to your clients. You all know what you think a long-term investment is. Perhaps you agree with a recent contributor to Money Box who said, ‘I think, frankly, long term in the UK market is no more than three years.’ No, the FSA said in its projections review in July 2004 that "over an even shorter timeframe [than five years] the equity market is more like a game of chance than an investment". Three years is not long term. Perhaps you think five to 10 years is long term. No, in the specifications the Government produced for the Sandler products it calls its medium-term product five to 10 years. Its pension product is the long-term one.
The figures show this is right. If you picked a random period of five years in the last 100 and put your money spread across all the companies listed on the London Stock Exchange, you would have a one-in-three chance of ending up no better off at the end than at the start. Of course you would have two chances in three of making money; sometimes quite a lot, but a one-in-three chance of not making any money is not very good. Even after 10 years the odds shorten to about one-in-four. If you had invested in the FTSE100 Index on 21 November 1997, seven and one-quarter years ago, your shares would be worth exactly the same today as they were at that time. Do not mention dividends to me, because that will probably just about pay the charges.
Is it 15 years? Funnily enough, that is no better than 10. So how long is long term? 100 years is a great number. Over the last 100 years stock market-based investments have done better than investments in other things. There are two problems with that. The first is that we have only got one period of 100 years to look at, because that is really how long things have been going, or at least how long Barclays have been looking at them. The other is that humans do not have 100 years to wait. If I lived forever, of course I would put my money on the stock market. If I could choose when I wanted it. Fortunately for humans, 25 years is almost as good as 100. Much less than 25 years and there is a real risk you will end up worse off.
Do not take my word for it; take the word of the FSA. On 28 June 2003 I interviewed Norman Digance, who was then General Manager of Investment Business and is now Head of Financial Promotions, about investment returns. I asked him, on air, how long is long term. He said, ‘In our words, long term is basically 20-25 years.’ I checked, I said, ‘You are saying the FSA’s view of what is a long-term investment is 20-25 years?’ ‘Yes, there is nothing new about that,’ he replied, and the Press Office confirmed that was true. There it is.
Of course that has not been the experience of people who have worked in the financial services industry over the last 30 years. For the last quarter of the last century, a whole generation, shares went one way, they went up. The three times they fell in a year, they went back up the next year by more than they had fallen. For a whole generation of financial advisers, shares were a one-way bet. I do not know anyone in the industry who thinks that is true now or will be true again.
Abuse of Language
When talking about the stock market, please use the word ‘shares’. It is much clearer than the phrase I heard the other day, ‘Put your money in high-yielding UK equities,’ one of those much-loved phrases designed to be true but misleading.
Let me come on to another abuse of language. I said earlier that I thought calling retail intermediaries financial advisers could fail the test of being fair and not misleading. What do people need financial advice on? I have listed 12 categories, but there are probably more: debt, mortgages, credit cards, social security, insurance, income tax, pensions, bank accounts, tax credits, investments, budgeting and savings accounts. On how many of those 12 can IFAs give detailed advice? Pensions, yes; investments, yes; savings accounts, maybe; mortgages, that is probably other retail intermediaries; insurance, that is general insurance; debt, no – some will not even tell you to pay off your debt, as the Charles River Associates report found; credit cards, no; social security benefits, that is the DSS; income tax, you may know ISAs are tax-free but you cannot really check somebody’s PAYE statement for them; bank accounts, no; budgeting, no.
If you cannot give advice on at least half and probably three-quarters of major financial issues, in what sense are you financial advisers? You know a lot about the products you sell. You can advise about that, but you cannot give general financial advice. In many ways, why should you? No one pays you to do it, as we heard earlier. For example, the spotty youth in Dixons can sell you a music centre and may even be able to compare features and prices with others on offer, if you are really lucky, and of course sell you unregulated insurance products to go with them, but they are not Hi-Fi advisers. They cannot pick the best subwoofer, tell you whether you should put spikes on your speakers, or compare SCART and Video-S. They are sales staff for the products of Dixons’ panel of providers. In that sense, financial advisers are fairly and not misleadingly described as investment product sales staff.
It is not a trivial point. You are only advisers and have to be advisers because the stuff you sell is so ridiculously complicated. Take State Second Pensions. The ABI has written to six million people to say they should consider contracting back into State Second Pensions. This is a financial question so people go to financial advisers. Will you advise on it? No! But who advised them to come out of the State Second Pension or SERP then? Financial advisers. You are quite happy to advise people to come out, and I agree the Government was encouraging you to do so at the time, because that is a sale and commission, but going back in ‘is very complicated; no, I cannot advise you on that.’
Why was anyone advised to come out of the State Second Pension and SERPs in the first place? Is not the most basic piece of financial advice to spread risk? Why were people encouraged to put all their pension money into a basket attached to the rollercoaster of the stock market rather than putting half the eggs in that basket and another half-dozen in a rollercoaster attached to the Government? I know, ‘Who trusts Government?’ Who trusts financial services? How can you get it back?
Commissions and Mis-selling
Would pensions have been mis-sold at a cost to the industry of £13.5 billion without commission? Would £250 million worth of AVCs been mis-sold without commission? Would 50,000 individuals have lost maybe £600 million in split caps if no commission was involved? Would 450,000 older investors have lost up to £2 billion in precipice bonds without commission? And, as came to light just the other week, would 3,200 people face the loss of £17 million in Eurolife if advisers had not been paid commission to sell a product that gave a modest return for putting all your money at risk in one untried company? I doubt it.
It is the price you all pay. As we saw earlier, the cost of FSCS is £202 million on every one of your bills every year when you come to pay your dues to the FSA. Of course this is not all down to IFAs; a lot was done by tied agents. If there are any multi-ties here, do not look so smug. I am sure your turn will come. However, they were all mis-sold by financial advisers and those financial advisers were dependent on commission to earn the bulk of their income.
When the Treasury Select Committee or the ABI feel that some form of commission reform is essential, people respond in two ways. First, they say that all businesses depend on sales to pay their staff commission; the more they sell, the more they make. That is true, but financial products are different from washing machines and widescreen televisions. When we buy electrical goods we pay upfront and we use it upfront. We know if it works and we know if we like it. If after five years it is not that great anymore, we buy another one and pay for that then. What we pay for it and how we use it are at the same time. Financial products are the opposite. You either pay upfront or you pay every month for 20 years. It is only when you finally have to see whether it has worked or not, what your pension is – or in the case of the hapless Eurolife Bond investors, whether you are going to get your money back, never mind the 40% growth you were promised – it is only then that you realise it has all gone horribly wrong. It is too late to take it back and very hard to get compensation. Your life can have been ruined. If the television breaks down, it is not a life-damaging event – unless you miss an episode of 24 of course. It is an annoyance; it is not homelessness or poverty in old age.
The other argument I hear is: ‘How do you motivate people without commission?’ It may come as a surprise, but most people who work do not get commission. What motivates doctors, teachers and police officers? What motivates journalists or politicians? What motivates the people who work in WH Smith, clean your offices, serve you in pubs, design motorcars or service computers? What motivates painters and decorators or, come to that, the good folk who work at the FSA? Okay, that is a mystery. But generally, if people do their job well they are valued, promoted and yes, given a bonus at the end of the year – a fair wage for a worthwhile job. That is what motivates most of the working population. If people do not do their job properly, they are offered advice, perhaps some training or reallocation. If that does not work, they are warned, disciplined and ultimately sacked. That is what controls people at work. It is called ‘management’. I do not believe the people who work in financial services are so different that they can only be motivated to turn up by the thought of earning £2,000 for selling a critical illness policy that may not pay up when you claim. Or that they can only sell a personal pension if they get 80% of the first year’s premiums and then 1% for the rest of the life of the product.
That is not to say commission dominates all your thoughts, biases sales and affects your judgement. I do not believe it does, in most cases. The point is it does not matter. It is not whether people are influenced; what matters is they might be. That is why Cabinet Ministers give up control of their investments – not because we expect them to be corrupt and favour businesses they are involved with, but because they must be seen to be pure. Commission is literally a conflict of interest between you and your customer. I share the view of MPs on the Select Committee, the view of the FSA, in the past certainly, and the view of the ABI, but perhaps I go slightly further to say that commission has to be reformed if trust is to be restored. Thank you.
24 February 2005