Recent events have seen the banks reverse their advice tanks off professional advisers’ lawns as the FSA has finally got round to reviewing selling practices.
These practices include the banks in some cases receiving anywhere up to 9 per cent commission on investment bonds. This figure was not in the FSA’s review but is a mix of upfront commission and indemnified trail. However, the banks were not a solo act. Far too many providers rolled over and were accessories in the sale of unsuitable products.
The volume of bonds sold in quarter four of 2012 concerns me and those accepting the business need to be brought to book just as those who sold them (I refuse to use the word advised).
The fact that the majority of products sold were to provide cash-flow for banks and not solutions to someone’s actual needs is why the RDR may just save this sector.
Adviser charging is bad for investment bonds. Taking 3 per cent as an adviser charge leaves the client with a maximum withdrawal of 2 per cent in year one and the 0.5 per cent trail is 10 per cent of the annual income of 5 per cent available to clients. Perhaps that’s not the best way to present it but it is the way that many reviewing such arrangements will comment, as will some clients.
Not only does adviser charging have a short shelf-life, the legacy income stream currently being purchased by advisers will wither as the OFT investigation gains its own momentum and then spreads to all products, not just pensions.
This will happen and the zombie life companies could find themselves hopelessly exposed, as will some open book providers where legacy is the core of their profitability or, in some cases, the only source.
It could even mean providers having to re-state previous year’s accounts where anticipated income in the future has been utilised at inception or over the early years.
Exit penalties are often not transparent. The simple fact is that the values quoted are often best described as fantasy values.
Is it not true that any investment’s real value is its encashment value? Or, if we are being truly sensible, its post-tax value?
The need for transparency must extend to all tools that means no more black boxes containing economic models or Monte Carlo models that prove even less than an old fashioned illustration.
It is not acceptable for advisers to use tools but have no idea whether they are cutting edge or a complete sham. At the moment we have a system that allows people to cite intellectual property rights as the means to keep a lid on their box.
Using tools where you have no knowledge of their sensitivity or otherwise to alter assumptions is no better than selecting Arch cru without taking the time to do any sensible due diligence.
When the leaflet for Arch cru hit my office I was embarrassed as I thought it was a personal invite to a lap dancing bar, given the ladies on its cover. It went into the bin, the best place for it in hindsight.
Robert Reid is managing director of Syndaxi Chartered Financial Planners