When is an orphan not an orphan? I found myself asking this question last week after reading an intriguing column from Invest Southwest managing director Dave Penny.
Writing in Money Marketing, Penny took the side of millions of bank and building society customers, who are faced with having no advisers to turn to following their closure of many banks’ direct advice arms.
Penny argued that today’s asset-backed investments require regular asset allocation and rebalancing. But following the banks’ withdrawal from the advice market, investors are potentially left with unbalanced portfolios, unable to amend their investments as circumstances, or markets, change.
Not only, but Penny made serious allegations about banks’ behaviour with regard to this issue. He claimed: “Advisers are routinely being threatened, supposedly under the Data Protection Act or non-solicitation clauses, to stop them having any contact with previous clients.
“It is a thinly veiled attempt by the banks to protect their profits at the expense of clients. And it keeps the unbalanced, unmanaged portfolio time bomb ticking and growing in potency.”
Penny warned that so grave is the problem that it may even be classed as the next misselling scandal, “threatening to overwhelm our formerly respected high street institutions.” I’ll come back to that contention in a minute.
Crucially, Penny’s warning won him an ally, namely Money Marketing itself, which devoted an editorial to the issue. The paper argued: “If [clients] are not receiving ongoing advice from the banks there should be nothing stopping advisers from stepping in to offer much needed support.”
OK, now let’s start disentangling some of these issues. First, it is certainly correct that a client’s investment assets should ideally be rebalanced regularly to take market conditions into account as well changing attitudes to risk.
But the reality is that this has rarely, if ever, been what banks were interested in doing, even when they had fully-operating advice arms.
My former mother-in-law was a customer at Lloyds Bank for more than 40 years. Some time in the early Noughties she succumbed to one of those “offers” where the bank says it will pay you a small lump sum if it can’t “save you money”.
As a result she ended up with a significant part of her cash savings in a series of Scottish Widows investments she didn’t understand and always remained wary of. When markets collapsed in October 2008, she became an early capitulator and liquidated her suddenly-more-meagre portfolio, placing what was left back into a savings account – with Lloyds, naturally.
In the five or six years that she had equity-backed investments, my mother-in-law was never contacted once by any adviser from Lloyds to rebalance her portfolio. When she disposed of her investments, no-one called, whether to attempt to dissuade her or offer her an alternative strategy more in tune with her needs or fears.
I strongly suspect that millions of bank and building society customers are or have been in the same boat for years. They have gone through umpteen crashes, recoveries and market corrections over the past decade or longer without any attempt from their banks’ advice arm to offer further help or advice.
The only thing their “advisers” – and I’ve deliberately used quotation marks around that word – were interested in was the commissions they earned, plus bonuses for reaching their sales target and any ongoing trail they might pick up along the way.
In that regard, if we are to call their clients “orphans”, we would have to add that they were orphaned at birth. Yes, there is a scandal in the making here.
But it is not a new one by any means: many of these orphans are now 15 or 20 years old.
Nor is it confined to bank and building society customers. Over the past 20 years I’ve lost count of the umpteen times Money Marketing has reported on disputes between IFAs supposedly soliciting former clients.
A year or so ago, a well-known adviser was left with £1.2m in legal bills after losing a case on the High Court over alleged poaching by former advisers at a firm it took over.
The reality is that clients are treated as fodder, not just by banks and building societies but by IFAs, who sell them a product and then rake in the combined commission and trail without ever attempting to contact them again.
Never mind rebalancing portfolios, why would you want to get in touch with someone you flogged a £30,000 with-profits bond to ten years ago, trousering 7 per cent commission in the process, when the potential benefits of doing so will be outweighed by having to deal with their niggly time-consuming questions? If time costs money, why waste it?
So when Penny argues movingly that departing bank and building society “advisers” – here’s that quotation mark again – should be able to target former marks with impunity and even potentially persuade them to shift their portfolios to whatever new businesses they choose to set up, we should remember that this is not an issue confined to the banks.
If so-called bank “orphans” can be shifted with impunity, this should apply to IFAs as well. And if there’s a new misselling scandal brewing, Penny should not kid himself that IFAs are exempted from it. Because they are not and never have been.
Nic Cicutti can be contacted at firstname.lastname@example.org