Although personally I enjoy the challenge of deciding my own investments, it obviously doesn’t suit everyone. For others, meetings with a qualified financial adviser who knows their circumstances offer a much less stressful way to make financial plans and manage their money. Having spoken to numerous advisers for journalistic reasons I know the contribution that they make to what are often complex decisions.
However, there is a question mark in my mind over financial advice that is not to do with its usefulness but with how the advice is put into practice. The problem is that for all their broad knowledge and experience, advisers do not have a free hand in making their recommendations, which is something that most clients will not realise.
Advisers today work under some tough constraints. They are heavily regulated and must be able to demonstrate that their recommendations are suitable for each client bearing in mind his or her personal circumstances. They also retain lifelong liability for any mistake they might make—so a client that has suffered a poor outcome could complain and seek redress decades later, long after the adviser has retired or moved to a different career. These stringent consumer protections exist for good reasons but they also have troubling consequences.
Alongside the need to satisfy their compliance team that their recommendations are appropriate for that particular client, financial advisers must also take steps to cover their lifelong liability for errors. Standard (and therefore cheaper) professional indemnity insurance will not usually cover them for advice on new or non-mainstream financial products, and so many advisers will not recommend them to their clients even in cases where they might be privately convinced they could be useful. Perhaps this is a good thing—new investment products and options can be risky and need time to build up a performance record. Mainstream, established options are often the best and most sensible.
However, unseen influences such as the need to satisfy their compliance department or keep within the scope of their indemnity insurance will tend to result in advisers steering most investors towards a broadly similar universe of products, to some degree regardless of their individual circumstances. This might not lead to poor results but I can’t help wondering whether it helps advisers to make the case that what they do is valuable and worth paying for.
If after going through a detailed fact-find, during which their financial circumstances are explored in depth, a client is likely to be encouraged to choose from a fairly limited range of mainstream investment options that look similar to each other, how valuable are they likely to judge the advice they have received? There has been considerable concern among policymakers and regulators recently that a growing number of people are making major decisions and buying investment products without taking professional advice. Similarly, survey evidence shows that a large proportion of the public is not willing to pay much, if anything, for financial advice.
If they are only being offered 50 shades of beige, this is perhaps unsurprising.
