I started my working life in 1998 and as an advisor in 2000. This was about the time when disclosure regulations came in and financial advisors had to disclose the commissions they were being paid by insurance companies. Back then, advisors took 50% of the first years contribution as commission for pension plans. I had started out working for PwC, where we charged a fee for the work we did, so commission was never an issue to me and I was always amazed at how much financial advisors would charge their clients and not tell them.
Fast forward to today and I am running my own business since 2013. I like to be transparent on all fees and charges that a client will pay me and the company that manages their money. The fees I charge are displayed on Bluewater’s website and all fees are put in writing just above where they sign their name on the Reasons Why document that is given to them. Given that I tend to talk to other like minded advisors, I had presumed that the financial advisory business was moving in that direction. But a few things have made me think.
Financial advisors are regulated by The Central Bank and we are all subject to the Consumer Protection Code 2012. The general principles of the Consumer Protection Code states that a regulated entity must:
The principles of the Consumer Protection Code are clearly being ignored by a lot of financial advisors who are more interested in the large commissions they can be paid instead of acting in the best interests of their clients.
When advising a client on a financial product, I have to provide them with a mountain of paperwork. Some of which they have to sign, some they just have to read. This is supposed to be for their own benefit but most people don’t read this information and it is an opportunity for unscrupulous brokers to bury fees in the mountains of paperwork given to a client. This means that if there is a complaint made against them, the broker can point to the document with the fees disclosed and the client has little recourse with the Ombudsman.
Even the wording of the documents we have to produce is a nonsense. We have to put in the authorities and Acts that regulate a financial advisor. What does a client care that Bluewater is regulated by the Central Bank of Ireland under the European Union (Insurance Distribution) Regulations 2018; as an Investment Intermediary under Section 10 of the Investment Intermediaries Act, 1995 (IIA), an Insurance Intermediary under the European Communities (Insurance Mediation) Regulations, 2005 (IMR) and as a Mortgage Intermediary under the Consumer Credit Act, 1995? It’s nonsense. If you make an appointment with a doctor, you expect them to be qualified to examine you. Likewise, you expect a financial advisor to be qualified. Including all this information in a document only bores a client and they will start skipping through the document.
Any recommendation should be reduced to:
A fiduciary duty is a legal obligation of the advisor to act in the best interest of the client. The fiducary is forbidden from acting in any manner that is averse or contrary to the interests of the clinet or from acting in their own benefit.
The Department of Labour in the US has tried to introduce a fiduciary duty for financial services companies. The fact that there was push back from parts of the industry says it all; they object to having to act in the best interests of their clients?!!
With some financial advisors clearly not acting in their clients best interests in Ireland, maybe it’s time for them to be legally responsible for the advice they give and give advice to a higher standard than they currently are.
I think commissions can be of use in the financial services market, so people should have the choice of paying by fee or commission. Some people are perfectly happy for their fee to come out of the money they are investing. But lets do away with the misconception that the insurance company is paying the advisors cost. You are. If you are paying the fee from the product, let is come directly from the premium being paid. If you contribute a €1,000 a month into a pension and the set up fee is €1,000, in year one €11,000 is invested and €1,000 is paid to the advisor. From year 2 onwards, the full €12,000 is invested.
Under the current system, an advisor can be paid up to 5% of the contribution by the insurance company. If you are retiring with a €1m ARF, that’s €50,000 commission being paid to the advisor. The insurance company has to recoup this outlay from your policy over time through a higher management fee. So if allocation rates are banned, there is nothing to recoup and so the management fee will come down. You can then agree on the fee that the advisor is paid without them having the conflict of knowing they could be getting €50,000.
Let me know what trust issues you have with financial advisors? Do they speak in jargon? Are there ways we operate that you would like changed? Drop me an email at firstname.lastname@example.org