Public confidence in the financial services industry has reached an all-time low and yet the need for professional advice has never been greater.
As more final-salary pension schemes close to new members and state retirement benefits continue to decline in real value, it is clear that people now have to take on much more responsibility for securing their future lifestyle.
The past 20 years have seen an enormous change in the way that financial services are controlled. While most of us find some of the regulations irksome, there can be little doubt that the consumer has far greater protection today than before the introduction of the Financial Services & Markets Act.
Yet the big misselling scandals just keep on happening. A few years ago it was precipice bonds, split-caps and with-profits bonds. More recently, it may have been film partnerships. Today, it could well be hedge funds.
Inevitably, the regulator is usually a step or two behind where the current action is taking place. When the problem comes to light, enormous sums are then spent on professional and other costs and, ultimately, all the cost of compensation falls on the industry. Companies that play by the rules have to pay for the malpractice of others, not just in terms of the cash costs but also the reputational damage to the industry.
I have had enough of this. It is bad enough having your profession regarded in a similar light to grave robbers. The far more important point is that right now there are hundreds of thousands of people who desperately need sensible advice if they are to avoid a financially challenged retirement.
Soon the industry will face one of its biggest-ever upheavals with the ending of polarisation. Will this help to rectify the fundamental problems? No way. Indeed, some of the steps such as scrapping better than best are clearly in the wrong direction. Sending out menus of charges to customers is not going to stop misselling. What is needed is a realignment of interests so that the adviser is working solely on behalf of the client.
In the case of investments, this is impossible if adviser remuneration is linked to transactions. No matter how deep-seated your honesty, you will have an underlying preference for maximising the number of transactions and favouring products with the highest commission. No amount of policing can ever cope with this fundamental conflict and until it is forcibly removed, misselling scandals will recur regularly.
In contrast, a remuneration system based on ongoing payments linked to the value (not cost) of the investments, which can be switched by the client at any time to another adviser, ensures that the adviser and the client are sitting on the same side of the table. There is no point in selling a high-commission product because the client may well transfer the financial benefit to another adviser. The adviser is rewarded if the client remains loyal and the investments appreciate in value. That is called alignment of interest.
Scrapping initial commission sends shudders of horror through many advisers but what do they have to fear? In the short term there would obviously be a cashflow deficit but, if the business proposition is sound, this should be capable of being funded from banks or the venture capital market.
Once the initial pain has been endured, the adviser can enjoy the benefit of a much more stable source of revenue which will greatly enhance the value of their business.
When we took this decision at Bestinvest in 1999, it seemed a tough sacrifice to give up over £1m of initial commission each year but, as a business, we have never looked back since. Today, over 90 per cent of our revenues are recurring and linked to investment values, which is superb in terms of our ability to make long-term plans and retain staff.
The other big change that is needed to enhance the reputation of our industry is to toughen up the training requirements. It is still far too easy to become an investment adviser. Personally, I think that there should be an absolute minimum employment period of two years as a trainee before anyone should be set loose on clients and the current minimum qualifications should only allow advice in limited circumstances.
The Securities Institute Diploma should be the threshold for giving across-the-range investment advice although obviously some grandfathering would be reasonable for persons of long-standing experience.
Finally, I cannot let this opportunity pass without having a blast at the retail fund management industry. This is besotted with sales targets rather than ensuring customer loyalty and value for money.A move to performance fees would be a big help in terms of aligning their interests more closely with those of their investors. Now that the FSA has finally modified its rules, I hope and expect to see the major groups introducing these before the end of this year.
John Spiers is managing director of Bestinvest