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Are IFAs socially useful?

The RDR is but the latest in a long series of regulatory changes that present IFAs with questions, not the least of which is what income model is needed to ensure the continuing survival of their business.

Many have already established what that model needs to be and it seems clear that the costs to be faced by potential clients will inevitably preclude providing advice to large segments of society.

But does that need to be the inevitable outcome? Or are there ways in which IFAs can be socially useful, still provide advice, not just to the HNW client but to the poorest in society?

I believe so, and it involves IFAs providing solutions to the many questions that surround the world of banking.

Lord Turner famously commented that many of the activities of banks were ’socially useless’. Lord Turner also called for radical change to the system. So is now the time for IFAs to question the paradigm of banking as it has developed over the centuries, and provide an alternative?

A big challenge indeed, so let’s break it down into stages and let me use a very simple test to ask whether IFAs can be socially useful despite all the challenges they currently face.

Stage 1

In my last article I chose the example of temporary high balances, those arising from the  week in week out activities of house purchase and selling, the winding up of estates, or winning the National Lottery etc., to illustrate where the current FSCS limit of £85,000 could prove woefully inadequate if a bank went bust.

I am writing this draft using free “open source” software – is it time IFAs adopted the same methodology, and became socially useful by doing so?

Just as a very simple test and example – could a few of us prepare a “fact sheet” on the risks of temporary high balances, and leave that open, not just for peer review, but for the use of all IFAs not just for their clients, but for the wider public? Interested? Let’s see if anyone is?

But that falls far short of what I believe is achievable. Can IFAs go much further and not simply identify and publicise risks, which temporary high balances are simply one of many.

What does the recent banking crisis tell us? For me it is that the biggest risk faced by those who deposit their money in a bank is that the majority of the public do not realise that the second they do so it is no longer “their” money.

Do the majority of the public know, (do you know), that in a series of court cases* starting with Carr v Carr 1811, the second that money is deposited in a bank, it becomes the bank’s money – to do with what it will?

Do your clients know and fully understand that when they deposit their monthly salary or other money into a bank that it immediately ceases to be their money? Have you ever discussed and explained the potential risks of that legal transfer of ownership of “their” money?

Do banks, when accepting each and every deposit, carry out or update a full fact find – in the same manner as would be demanded of IFAs?

Do banks, when accepting each and every deposit, seek to determine, the appetite of depositors for risk – in like manner to the FSA regulations imposed on an IFA?

Do banks explain to depositors that it is now no longer their money and that the bank can take any risks they wish without any prior or ongoing reference to the customer?

Given the banking crisis, and its overwhelming social and economic costs, ask why a so called “retail distribution review” has not identified, nor sought measures to address, the risks faced by every member of the public who uses our current system of banking?

There are socially and economically useful solutions to the problems of temporary high balances. They could be adopted every time a house is sold, or when someone wins the Lottery. Solutions which entirely remove the risks involved. However, if you read the interim report from the Independent Commission on Banking – you will find that they dismiss virtually out of hand the very alternatives which would solve the problem.

No one in this country is immune from the failures of regulation which allowed a banking crisis, nor in my opinion does the interim report of the ICB come close, as yet, to offering alternatives that meet the needs of society – and by that I mean all sectors of society.

Those failures, and our current system of banking, are where I believe real opportunities exist for solutions devised and offered by IFAs.

Am I in any way correct? Well, you could ask Mervyn King, who in October 2010 said:”Of all the many ways of organising banking, the worst is the one we have today.”

But why not ask your clients – if they are 100 per cent happy with the social and economic costs that we all now face following the banking crisis? Are they 100 per cent happy with bailing out the banks, yet seeing bonuses in the £Ms still being paid out?

Then ask yourself – whether you are willing to play a part in developing alternatives, for yourself, for your clients, and for wider society?

If your answer is yes, would you let me know, please?  I will then suggest how this can be taken forward as an “open source” project.

*The case law which grants legal ownership of money deposited in a bank – to the bank to do with as it will, and establishes that the depositor simply becomes an ordinary creditor – Carr v Carr 1811, Devaynes v Noble 1816, Sims v Bond 1833, Foley v Hill and Others 1848.

Mike Fenwick is an industry consultant



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There are 7 comments at the moment, we would love to hear your opinion too.

  1. Mike Fenwick is an industry consultant

    Really, never is!

    The answer is ‘Yes’

    I will then suggest how this can be taken forward as an “open source” project.

    Go on then!

  2. Good article but nothing really new. Unfortunately people need banks.
    The days of weekly pay in cash are virtually gone and with BACS salary paid direct into a Bank Account, the bank can accurately predict when money will be recieved, how long it will take deplete by customer withdrawal and know how much they can “play with” in their high risk merchant style banking activities to maximise bank profit and minimise the return to the bank account holder.
    Why for example do Banks and Product providers and indeed IFA’s offer a “Discount” on high net worth business.
    Why should a HNW be able to invest a Million pounds and pay say 2% for the fees, when an ordinary person invests £10,000 and pays 4 – 5% (it should be the other way round)!
    Governments of all persuasion want people to save for planning and retirement, yet are penalised or worst still dont have any investable assets or NDI

  3. If warning clients who temporarily have over £85,000 is an example of social usefulness then Mike you do not live in the world I inhabit. I was an IFA and on retirement have worked for a charity helping people in financial or other difficulties. I have never seen anyone who is concerned about having too much in the bank but I see many who have nothing and are many thousands of pounds in debt because of banks previous willingness to grant overdrafts, personal loans and credit cards to people who should never have been given that money. I have to say that I have never met a client who has been put into a difficult position as a result of an IFA, all these people dealt directly with their bank and most have all their debts with the one bank.

    99% of these people would never go near an IFA and following the RDR that will not change.

    IFAs are business people and this type of client does not make them money so why should an IFA have anything to do with them? Also IFAs don’t have the detailed knowledge of the benefits system or the time to negotiate with creditors or arrange for clients to be made bankrupt.

    IFAs should get on with providing good information and advice to people with money and if they want to be socially useful, devote time to a charity helping people with money problems as a separate activity.

  4. What planet is this guy living on ?

  5. Many IFA’s including myself have been operating on a ‘socially useful’ basis for some time. By providing broadly based financial advice to a broad swathe of society, including to those who couldn’t afford it.

    I’ve found it intriguing that under a (so called) socialist government so many people, due to their lack of financial clout, have been denied access to sound financial advice by the implementation of clumsy, innapropriate and opportunistic regulation.

    In Mike’s piece I see his example of temporary high balances as just that, an example, an illustration of his broader point.

    When the major banks abandoned their relationship approach to customers (many years ago) in favour of the transactional model many IFA’s saw this as an opportunity to fill the gap. However many did not, the business men followed their lead to profit and implemented the same transactional model.

    If more forward thinking collectivists within IFA’ing had grasped the opportunity then, today we could be seen as a legitimate and trusted source of advice by the broader public.

    Instead we come second to accountants and lawyers, many of whom seek my and your advice on a regular basis and who are clients too because they understand the value.

    Where is the collective voice of IFA’ing, rebutting criticism and promoting the valuable service provided? Where is the public glossy campaign explaining to the public the forthcoming changes called RDR? We are divided and weak, susceptible to regulators, press coverage and industry bodies.

    Mike Fenwick sems to understand this. Clearly the mess banks have got themselves into is an opportunity for IFA’s, whether this can now be exploited on a collective basis is an interesting question.

  6. To Mike’s detractors I say READ and UNDERSTAND what he suggests and then comment sensibly. By jumping in with anonymous negativity all you do is raise questions about your own ability to comprehend even the most basic of suggestions from someone who saw all this mess heading our way almost 30 years ago.

  7. Mike

    Nail on the head.

    I am not one of these, but remember the man from the Pru, the Pearl, the Co-op etc.

    People who started people on the road, to realising their dreams. These guys don’t exist any more and I like to think that IFA’s have assisted in replacing what they did.

    Without these people and IFA’s many people would have and would still fail to reach their dreams


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