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Don’t bank on advice

One of the concerns over the retail distribution review is that some financial advisers will be nothing more than salespeople or the type of advisers that are often found working in banks and building societies.

It is a real concern as the latest undercover investigation by Which? on the mortgage market illustrates, as once again the banks are not exactly portrayed in a shining light. A couple of years back, another of its investigations found that two out of 10 bank advisers were not doing their job properly.

The latest investigation shows that banks are particularly likely to try to sell insurance. One adviser was concentrating more on selling the insurance than on advising about the mortgage while another gave quotes for insurance that totalled more than £100 a month, despite the researcher saying they already had some sickness cover through their employer and were on a tight budget.

But why should we be surprised? The banks are currently in the dock over unauthorised overdraft fees and the quality of advice they give has long been called into question. You only have to dig into the archives to wonder whether tied advisers really know what is best for a customer.

Payment protection insurance is a case in point. It is well documented that banks rake in billions of pounds from the sale of these policies. It has been estimated that as much as a fifth of banks’ profits comes from PPI which is sold alongside credit cards and personal loans.

Around seven million policies are taken out each year, generating £5.5bn in premiums. Providers can earn revenue of £1,200 on a policy that can cost only £20 to sell. Despite probe after probe, sales of this expensive insurance go on unchecked.

Remember precipice bonds? Another easy sell a few years ago, thanks to juicy rates of return. Bank employees made the most of it.

Take staff at Lloyds TSB, flogging high income bonds as if they were going out of fashion. The bank estimated that the first plan would attract around £50m in autumn 2000 but it brought in £120m. Lloyds admitted that its staff were not up to scratch when it came to advising customers. Of those subscribers who had never before invested in equity-based products, a staggering 84 per cent (16,500) poured more than 20 per cent of their assets into the plan. A fine of £1.9m was the result.

Corporate bonds are also an easy sell to the nervy during market volatility. Tied advisers sold a shed load in the aftermath of the tech bubble. The trouble was they were still pushing them hard once the volatility had subsided.

IFAs had other thoughts, taking on board comments from highly regarded bond managers such as Stephen Snowden and Paul Causer who were warning that you would get a better return from a high-street savings account.

For the record, corporate bond funds were the best seller in the tied channel last month, according to the Investment Management Association.

Next, take endowments. At one stage, the Financial Ombudsman Service was upholding nine out of 10 complaints from borrowers who were sold endowment mortgages by banks and building societies before the Financial Services Act was introduced in 1988.

IFAs get a fair amount of criticism, some of it just. They too were found wanting by Which? in the mortgage survey and were also embroiled in the precipice bond saga. However, statistics show they are not the missellers they are perceived to be.

FOS figures suggest that IFAs are not to blame for many past misdemeanors. Uphold rates of complaints tend to be lower for IFAs than other sectors at around 30 per cent. Only around 15 per cent of complaints about precipice bonds were made against IFAs.

Besides if you go to an IFA, there is less chance of being encouraged to buy critical-illness cover with your mortgage by an adviser lamenting on Kylie Minogue’s breast cancer.

Paul Farrow is digital personal finance editor at the Telegraph Media GroupMoney Marketing

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