We all know there is no such thing as free advice and neither should there be. But with too many advisers pretending that advice is free, this statement is in danger of dragging down the essence of the profession.
We operate in a competitive market and, while it must be tempting to use a statement like this to make a client feel comfortable, it is not in the best interests of the clients, nor of our industry.
Those advisers who perpetuate the business model of product-led sales are dragging down the profession and are playing into the hands of those who want to knock the industry. It creates easy copy for the consumer press which likes to make readers believe that all independent financial advice is driven largely by commission. It creates a platform for the consumer lobby and makes the FSA wonder whether anything is actually changing against the background of treating customers fairly.
The FSA’s mystery-shopping exercises have highlighted the lack of transparency in some financial advice scenarios and how some advisers rely on product sales to the potential detriment of clients. Take its research in the equity-release market last year which revealed that 16 out of 17 advisers did not mention alternatives to equity release such as grants or benefits and many suggested the maximum value release.
How many of the sales in the insurance bond market are also product rather than advice-led? How many advisers look seriously enough at alternatives in the form of unit trusts and Oeics? It is scenarios like this that also play into the hands of those who want to knock the industry.
My point it simple. There is nothing wrong with commission-based advice, provided the client understands what this means and the adviser acts in the best interest of the client rather than their own best interests. But whatever remuneration method an adviser employs, it must be transparent and easily understood by the customer.
The fault does not lie entirely at the door of advisers. Many providers have their part to play in the debate. How could one provider, for example, justify a stakeholder product paying commission of 8.6 per cent? It justified it to itself because its sales went up but is that ethically right?
For advisers, being part of a professional organisation like the Personal Finance Society is about signing up to, and adhering to, an ethical code of conduct. That code of conduct is not there for the sake of it, it is there because it is the foundation for building a professional and valuable business.
Product-led sales should be a dying form of advice. We should be embracing the approach of moving towards more transparent and open forms of advice for our clients.
We need to be viewed by clients and those who commentate on our industry as being what we are – true professionals. If this means changing your business to reflect your professionalism, I would encourage you to do so soon. You could make a start now by asking clients to pay you an annual retainer.
The clients who see you as a professional, valuable source of advice will be prepared to pay for it. Those who do not might just be the ones who thought you uttered those words: “Advice is free.”
Tim Eadon is chief executive of the Personal Finance Society.