Impartial investment advice or hard-sell?
Posted on August 11th, 2010
Are you being advised about investments - or having investments sold to you?
Is a genuine financial adviser weighing up your situation and recommending solutions – or is a salesman trying to get you to buy something?
You’d think it would be easy to tell the difference. In reality there are many shades of selling and advice, and it’s often hard to distinguish.
The Financial Services Authority is trying to sort out the mess through a drawn-out process called the Retail Distribution Review. But it’s unlikely to fix the underlying problem, which is that salesmen of all guises will still pursue commissions paid them by investment companies, and so will be incentivised to sell those investments above all else.
Financial Mail continually highlights cases where banks and other companies mis-sell investments. You can read a couple of horrific examples of Barclays’ investment mis-selling here and here, for starters.
The problem? Barclays’ trusting clients thought they were being advised to do something in their best interest. In fact they were being cynically pushed into one of a handful of investments so that Barclays could earn commission.
Take Coutts, the posh bank being investigated for the sale of dodgy AIG bonds. Coutts’ wealthy clients, like Sir Keith Mills, pictured above, thought they were getting advice, but in reality they were being sold the AIG investments at least partly because of the huge commissions attached to them. The Coutts AIG Action Group, founded by Mills, makes the point powerfully.
And look at Towry Law, a large firm offering financial advice which has made much noise about the value of independent advice. As I wrote in a previous blog, Towry salesmen are incentivised by commissions to recommend a particular investment solution. Clients think they’re getting advice – but in fact they’re being more or less gently shovelled toward a single outcome, one which suits Towry’s own financial interests.
Then St James’s Place, another swanky outfit that targets the well-off. Although the salesmen are called ‘partners’, they only earn money when they sell certain SJP investments. Financial Mail recently revealed the existence of a rogue salesman at SJP (see here and here). There is no suggestion that this malpractice is anything other than a one-off within SJP. But what the case shows again is that even switched-on investors can be led into believing they are being advised in their own best interests – when in fact they are being sold something primarily for the benefit of another person or organisation.
I’ve also got doubts about the so-called ‘no-advice’ services offered by fund supermarkets or discount brokers, the biggest and most successful of which is Hargreaves Lansdown’s Vantage.
Hargreaves is adamant in spelling out that Vantage is not about providing advice: what it claims to provide are merely the ‘tools, help and information’ investors need to ‘become their own financial adviser.’
I’m a Vantage client and I read Hargreaves’ literature extremely closely. I would say, being as fair as I possibly can, that the information provided by Hargreaves reads like advice. It adopts the tone, vocabulary and attitude of impartial, helpful advice. In reality, though, despite appearances, what Hargreaves does is sell investments in order to earn commission from investment providers.
Hargreaves’ monthly magazines, the endless emails, and the weighty content of its website, all create the benign impression that the small investors’ interests come first. The less palatable reality is that Hargreaves’ revenues come from fund companies in the form of commissions (which are undisclosed to Vantage clients).
Hence the main substance of Hargreave’s communications to Vantage clients is, underneath it all, an endless string of buy recommendations. Buy UK equity income funds this month, buy gold funds, buy Japan funds, buy smaller companies funds, buy European funds, etc…..
If you bought everything that Hargreaves recommended you would be drowning in a morass of funds (not all of them by any means performing well, either). You wouldn’t be doing much selling of investment funds, however, because selling isn’t something that Hargreaves encourages its Vantage clients to do!
I’ve written about Hargreaves before in relation to undisclosed commissions, see here. Although I am a fan of Hargreaves in many ways, the firm’s refusal to disclose how much commission it takes from the companies whose funds it recommends is a major turn-off.
I’ve no gripe with the fact that these firms – from Barclays to Hargreaves Lansdown – are in business to make money.
My point is that all these firms are not honest in the way they present their services to their clients. Is it advice, or is it selling? And who is the client?
Until we know how much commission is being paid, and who is paying it to whom, all the information provided to investors by these firms has to be regarded as suspect.
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Tags: Investment, Investment Advice
Filed under Financial Tips |