I was recently asked what would make the financial services market “better”.
It was in the wake of the comments from Martin Wheatley, the head of the new Financial Conduct Authority (FCA) about asking banks not to sell dodgy products to customers.
There are several things that could be done –simple in concept, but very difficult to implement.
Unfortunately, they are difficult to implement in part because of Mr. Wheatley.
I don’t want to make this a diatribe –the poor chap has only just started, so before I have a go, it would be polite at least to allow him to get his feet under the table.
So look at this as some suggestions – and if you, the reader, can fault the logic, please let me know.
We talk about the “financial services” industry. It is about a service. That was what Mr. Wheatley was talking about, giving people a good advice service.
All his examples were about products.
The FSA rules are about products there are three main types of advisor -
- Tied – can only recommend the products of one company.
- Multi-Tied - can only advise on products from the range offered by a few organisations to which they are “tied”.
- Independent Financial Adviser (IFA) - can advise on products from the entire market.
Strangely, that is all about products as well.
The FSA brought in the Retail Distribution Review (RDR) that is supposed to move from mainly commission on products to fees. But what would the fees be for?
Logically, they are for advice – but actually, because of the rest of the set-up, they are actually fees for arranging the products.
Now that is OK, as long as somebody needs a product. But if the best advice for the client is to put the money in a sock under the bed, how does the product salesman make a living? Just because they can charge a fee for recommending a product, doesn’t mean that people will be happy paying to be recommended not to buy a product.
I did one like that, about 25 years ago, when I worked for the independent arm of a bank. To cut it short, the bank staff were trying to sell bonds, which paid 5.25% commission. It was fair enough, they were tied, that was the best thing they could sell. I did a short term pension (the client was 74) put it in a deposit account, used the tax relief and got him a guaranteed return of just over 100% in six months with life cover etc.
That paid 0.5% on the purchase price and about 0.25% on the deposit. The bank weren’t pleased (the client and his son, an accountant were!)
There is no way the commission covered my time, what I did was far more technically demanding and required a lot more knowledge of the tax system, pensions law etc. than flogging a couple of products.
When I worked for fee based IFAs we used to offset any commission against the fees (I only ever worked on salary, I didn’t like commission – because it didn’t seem morally right and because I would have gone broke anyway!) That works well with people who have plenty of money, but the mid- and bottom end markets are priced out of having independent advice, because they can’t be sure that the fees for somebody’s time sorting out all the tax implications etc. are going to be covered unless there is a product sale.
So it’s a nice idea to take out the “commission” incentives, but effectively that poses a potential problem for the good quality, independent advisors, the bottom of the range, tied ones (e.g. banks) aren’t going to be troubled, they’ll have a captive market because they are only going to be selling products, not advice.
You don’t buy products from an accountant, solicitor, doctor (or psychologist) except in exceptional circumstances – you buy professional expertise.
Financial advice is supposed to be becoming a profession, so why is it apparently seen as a product sales like double-glazing ?
And why is the technical standard so low?
From 2012 the requirement is for the Dip FS (or equivalent), a qualification I got in 1992/3, and that is equivalent to perhaps the first year of a degree.
Would you go to a solicitor or other professional who didn’t even have a degree?
And the “good advice” standard depends on “know the customer” rules that don’t actually work.
To illustrate that point, I did write to the FSA and the IFA’s professional body the PFS (and spoke at their conference last year) to explain this to them. I wrote to the Financial Services Skills Council (who set standards for financial advice). Relating to the FSSC notes about “know the customer” and “assess attitude to risk” I asked among other things:
Don’t advisors need to know that the way in which you frame a situation (describe it as risk of loss or chance of gain) can change people’s decision (e.g. if you say the chance of loss is 50% you’ll get different replies from the same people than if you say the chance of gain is 50%, although they are logically equivalent and should get the same answer). How can the “risk profile” be accurate if two company’s asking the same question in different words will get a different profile? What psychometric properties have the risk assessment methods, have they been subjected to any form of unbiased mathematical analysis?
I never got any answers.
So perhaps we could start with thinking:
How do you determine what customers actually want? Then examine what technical requirements and knowledge are required to give them what they want (both psychological and financial).
Then look at what business models might work for giving professional advice to customers.
Starting with an adapted model of product sales doesn’t seem the best way to get to a model for professional advice.
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