Ian Thomas, Pilot Fiancial Planning
'Can We Still Trust Financial Services?'
As I’m writing this article, the Barclay’s LIBOR-fixing scandal is headline news. It’s just the latest in a long line of revelations which have caused most people to question whether banks – and probably anyone connected with finance – can be trusted anymore.
I should put my cards on the table at this point and admit that I worked for over 20 years in the City and so none of the recent news comes as much of a shock. Indeed, many similar issues were raised back in 2006 by the then Chairman of the FSA, Callum McCarthy. In a speech entitled ‘Is the Present Business Model Bust?’ he shone a harsh light on the opaque, commission-based, sales-driven world of financial services. His key messages: incentives affect behaviour and the customer is losing out. Sound familiar?!
This speech kicked-off a review of retail financial services which is coming to fruition on 1st January 2013. From this date, financial advisers will no longer be allowed to receive commission payments from new pension and investment products and will need to agree a separate fee with their clients. They will also need a higher level ‘Diploma’ qualification (roughly equivalent to an A Level) and will either be categorised as Independent or Restricted.
The higher minimum qualifications do not yet reflect the end-game of equivalency with the legal or accountancy professions, but some advisers have already voluntarily attained Chartered or Certified Financial Planner status (roughly equivalent to a university degree) and many more are on their way.
In my view, the Retail Distribution Review (RDR) will certainly go some way to changing the financial advice industry for the better. It’s worth bearing in mind however that not all product-types are impacted: annuities, life insurance, mortgages and so on will still be permitted to pay commission to financial advisers. Additionally, most investment and pension products sold prior to 2013 will pay on-going commissions to advisers for many years to come, so it’s worth checking whether any products you own (or are thinking of buying) still offer value for money relative to the commission-free alternatives, which are now becoming available.
Although a more professional and qualified advice sector will certainly help improve trust in our industry, it may not entirely eradicate some of the more deep-seated conflicts of interest. As I see it, there will fundamentally be two possible business models for financial advisers, post-2012.
Firstly there is a sales model, where financial products are transacted in return for a fee payment. Despite the increased transparency that the commission ban creates, there remains a strong incentive for the adviser to sell a financial product, or he/she does not get paid.
The second model is fiduciary (from the latin fiducia, meaning ‘trust’), where the adviser is obliged to put the client’s interests above their own. This may sound too good to be true, but there are already a small but growing number of professional financial planners across the UK operating on this basis.
As Robert Louis Stevenson remarked: ‘everyone lives by selling something’, but under a fiduciary business model the ‘product’ being sold is trusted, expert advice. Product transactions may, or may not, follow.
Aside from the regulatory changes afoot, there are other encouraging signs that certain pockets of the industry are doing their bit to recapture the public’s trust. If you have a particular interest in this area you may like to take a look at the Question of Trust Campaign (www.thequestionoftrust.co.uk), which is supported by the Institute of Financial Planning.
I look forward to a time where people expect the best from the financial services industry, until proved otherwise, rather than vice versa.
Contact Ian Thomas at Pilot Financial Planning:
08453 712 808, ian@pilotfinancialplanning.co.uk
www.pilotfinancialplanning.co.uk
Pilot Financial Planning is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.
First published August 2012 By The Dart