I have written a lot about the role of the financial advisor and the lack of trust in the people giving advise in the industry that I have worked in for over 20 years. This came to the fore for me again when a new client came to me when they had doubts over an investment recommendation that their financial “adivsor” had made to them when they had come into a sizeable sum of money. It was a pretty standard investment bond but the advisor was getting paid €50,000 for setting up this product!
While the financial advisor industry has improved over the years, there are still lots of people out there who are nothing more than salesmen, out to maximise the commission available to them. With an opaque charging structure for financial products, it is easy to hide these massive commission payments. It makes it near on impossible for ordinary people to distinguish between who is advising them in their best interests and who is just trying to sell them products in return for the largest commission available. So what can you look out for?
Ask if they will work for a fee – A proper advisor will be happy to work on a fee or a commission basis. They won’t mind as long as they are getting paid. A salesman knows that you will never pay the juicy commissions that the insurance companies will pay out (which you are paying for by the way through a higher management fee) and so will avoid doing any work for a fee.
Ask for a clear summary of fees – In their bid to provide consumers with as much information as possible on financial products, the Central Bank have created a great place for salesmen to hide their fees. Consumers get fatigued by all the paperwork they have to go through and lose interest so it is easy to bury fees in the paperwork and still be compliant for the Central Bank. Ask for a clear breakdown of the fees charged on your product.
If you are told there are no fees, run Would you work for free? If not, don’t expect a financial advisor too and don’t believe a salesman if he says there’s no charge, the insurance company will pay him. If the insurance company is paying him, it is being recouped through your management charge, so you are paying it.
Your advisor keeps on switching your policy to another insurance company – In order to be able to recoup the commission paid out, insurance companies will impose a penalty for funds transferred to another provider in the first 5 years. Once that period is up, some salesmen start transferring all their business from one company to another and claim the full commission again and the 5 year penalties start again.
Products only – If you have an ongoing relationship with your advisor but they only talk about products. Have they ever talked about paying down your mortgage early (no commission), leaving cash on deposit (no commission), leaving money in the business to avail of tax free retirement relief (no commission). If you want your financial advisor to advise you on your future, you need advice on more than just financial products.
Qualifications are no guarantee – To sell financial products, you need to be a Qualified Financial Advisor (QFA) which is a useful but easy to get qualification. There is also the Certified Financial Planner (CFP) designation which you need a Graduate Diploma in Financial Planning to get. CFPs have to adhere to a code of ethics, one of which is to act in the best interests of their clients. This is also contained in the Consumer Product Code which is drawn up by the Central Bank but lots of salesmen have no problem ignoring that. So don’t expect a qualification to change their approach to charging.
Instinct – Use it. If they are being pushy about the sale, vague about charges, selling you complicated products that you don’t understand (they are designed that way and have high fees), speak to someone else and get a second opinion.
The easiest thing for a consumer to do is ask the advisor if they will work for a fee.
Let me know if you have any questions or stories on bad advisors you would like to share with me. You can contact me at steven@bluewaterfp.ie
