Just 10 per cent of people rely on an independent financial adviser/broker for advice, writes FIONA REDDAN

‘THERE ARE worse things in life than death. Have you ever spent an evening with an insurance salesman?” asked Woody Allen. If you agree with this sentiment, getting professional financial advice may be the last thing on your agenda, given that many so-called advisers also have sales agendas.

Indeed, in a recent survey by Hibernian Aviva, 32 per cent of people said it was better to get financial advice from friends and family than financial advisers, with just 10 per cent relying on an independent financial adviser/ broker for advice.

However, there is no doubting the importance of getting your finances in shape, particularly given that so many people are facing life-changing issues at present, such as unemployment, overwhelming debts or inadequate pensions. The difficulty is in getting the right advice to help you do so.

The most cursory glance at the complaints the Financial Services Ombudsman regularly receives will reveal many that are related to poor financial advice.

Some relate to high-profile incidents such as the repackaging by Friends First of an ISTC bond – a high risk, high reward venture, most suitable for high net worth or institutional investors – which was then sold on through its broker network to retail investors who between them lost €43 million when the firm almost collapsed in 2007.

Many others, however, centre on people being sold products inappropriate to their needs, such as elderly people being recommended to lock away their money in 10-year term products, or very cautious investors advised to put money into risky “growth” products.

So, given the problems associated with getting financial advice, what do you need to know to ensure you get the best advice to suit your needs?

When should you seek out professional advice?

John Lowe, managing director of the Money Doctor, likens getting financial advice to asking someone whether they would like Tiger Woods’s clubs or swing.

“You’re not going to be playing like Tiger with just his clubs, you need a coach essentially to help you.”

So, if you’re dealing with potentially life-changing issues, such as pensions and life assurance, then you may find a “coach” or professional advice worthwhile.

If, however, you’re looking for a “commoditised” financial product, such as home insurance or a new credit card, the services of a professional financial adviser may be superfluous. “It’s akin to going to a Harley Street surgeon and asking for an aspirin,” says Marc Westlake, head of wealth management with Goldcore Wealth.

Instead, he recommends you get on the internet and compare prices to find the best product for you.

Who offers financial advice?

In the Irish market, there are three types of financial advisers.

1) Tied agents such as financial institutions sell products from a particular financial institution they work for, and, while they must give you a product that is suitable for your needs, they cannot shop around on your behalf;

2) Multi-agency intermediaries such as investment or mortgage brokers advise on and sell products from a number of financial services firms;

3) Authorised advisers offer products from all financial services providers in the market.

These advisers will deal with a broad range of financial issues and are suitable for most of the population.

If, however, you have significant funds to invest, or are facing complex financial issues and also need professional tax advice, you could seek out the services of a wealth manager, or private bank.

For high net worth individuals, there is a plethora of service providers in the Irish market – and, despite the recession, their number is growing dramatically.

In addition to international banks such as Goldman Sachs, Barclays and HSBC, several Irish banks have their own dedicated wealth management divisions, while stockbrokers and accountancy firms also have their own private client services.

Generally, a private bank deals with clients who have investable assets of more than €1 million.

Another option is a firm like Goldcore, which is looking to fill the niche between high net worth individuals and the average consumer. The firm, which also sells precious metals, recently launched a wealth management service aimed at those with investable assets of more than €100,000.

For a full range of options, the Financial Regulator publishes a list of advisers on its consumer website: www.itsyourmoney.ie

How do I select the right adviser?

For many of us, the first port of call when looking for financial advice is to ask a friend or family member, as evidenced by the Hibernian Aviva survey, in which 59 per cent of people said they chose a financial product or service because it was recommended by friends or family.

The other common option is to head straight towards the bank or building society. However, remember that such institutions are generally “tied agents”, meaning that they can only advise and sell their own products, or those products offered by providers with which they have relationships, thereby limiting the value of the review.

Of late, financial institutions have become proactive in getting customers in to discuss their finances with them. Just like car dealers are offering “free winter car checks” to entice customers on to their forecourts, many financial services firms are also hoping to win new business by giving their customers free financial advice.

Irish Life, for example, says it is getting 1,000 customers a week availing of its current free financial review offer. The 45-minute financial review covers all aspects of an individual’s finances, such as income protection, retirement planning, and saving goals.

While the review has its benefits and can help you get to grips with your finances, the problem is that the firm can only advise on products offered by either Irish Life or Permanent TSB. This means that you may end up buying products which can be obtained cheaper elsewhere or which don’t meet your needs as well as products offered by other providers do.

As Goldcore’s Westlake says, you must have an “expectation that I’m going to be sold a product”, while Lowe also cautions against such an approach, referring back to his golf analogy. “Unfortunately that’s what a lot of the product sellers are doing, they’re just selling clubs – they’re not telling you why you need them.”

If you look for a multi-agency intermediary, such as a broker, the advantage is that they will offer advice on a wider range of financial products and can also shop around to get you the best deals.

So, be sure to look for an intermediary who deals with a wide range of providers, and this will ensure you get a wider choice.

However, be aware that the broker may not deal with all providers in the market – Quinn Life’s products, for example, are not available through the broker network – while brokers may also have a conflict of interest in selling certain products due to the commission model.

Authorised advisers work on a “fair analysis” basis, which means that they are obliged by the Financial Regulator to conduct broad research of the market on your behalf and advise you on the opportunities/products that are most suitable for you.

Lowe suggests that there are two components to financial advice, “character and competence”, and you should seek out an adviser who offers both.

However, while the fair analysis approach means you have the best chance of getting independent advice, Westlake points out that this analysis only relates to the range of investments they have to offer. So, if they are not familiar with certain products, then they won’t be able to offer them.

As Lowe adds, “If they only represent two agencies, unless they’re big friends of yours or you’re happy with those two agencies, then it may not be the best option.”

Moreover, the commission model, as discussed below, may also be an issue.

Finally, before you contact any adviser, check that they are authorised to offer financial advice. You can do so by calling the Financial Regulator on 1890 200 469, or by checking its website.

What conflicts of interest do advisers have?

Once you are aware of who you are dealing with, be they a tied agent, intermediary etc, you will be better prepared to select an adviser who most suits your needs. However, your next step is to find out what conflicts of interest an adviser may have.

The benefit of the tied agent model is that it is so transparent – for example, EBS sells EBS products, AIB sells AIB, etc – but when you look for a broker or authorised adviser, possible conflicts may not be so clear.

The main issue arises from the commission-based model of remuneration, whereby many advisers and brokers receive a commission for products which they sell. These commissions can vary from product to product and provider to provider.

The adviser may have a vested interest in pushing certain products, and these commissions can be sizeable. For example, it could be as much as 1 per cent, so for a mortgage of €350,000, the broker could earn €3,500.

While the broker earning commission may not be so much of an issue when purchasing car insurance, it can become a problem for more important financial decisions.

“Commissions are an inducement to sell products – the bigger the commission, the bigger the inducement,” says Westlake.

“Take the example of someone with €50,000 of debt and €50,000 of savings. A financial planner might look to pay off or reduce debt, but a product-selling commission-based adviser has a conflict of interest. In order for him to receive any remuneration, he has to sell a product, so he’s got to essentially encourage the individual to invest that money in some type of product, in order for him to be paid.

“How can that commission-product driven model lead to good outcomes in that situation?”

So, if the adviser is working purely on a commission basis, he is really acting more as a salesman than an adviser. For example, if you go looking for a pension, you may be encouraged to take it out until you’re 75.

While the adviser may have very valid reasons for this, it may also be because the longer the term of the pension, the higher his commission.

To get around such conflicts, be sure to ask your adviser for their terms of business before engaging their services. While at present they may not reveal all commissions, they will be obliged to do so following the implementation of the consumer protection code later in the year.

Under the code, advisers must explain the option of payment by fee in advance to the consumer, while where a firm charges a fee and also receives commission in respect of the service/product provided to the consumer, it must explain to the consumer how the commission relates to the fee charged, eg whether it will be offset against the fee, either in full or in part.

Be aware though that even this may not reveal all sources of commission.

Westlake warns, for example, about the use of “soft commission”, such as trips for an adviser to the Galway races or the Heineken Cup paid for by a product provider, which, he says, “creates a lack of transparency and a conflict of interest”.

In Britain, funds are required to have what is called a total expense ratio figure available for customers.

This figure provides investors with a clearer picture of the total annual costs involved in running an investment fund – such as feeds paid to custodians, auditors etc, as well as the more usual management costs.

How can I ensure that my adviser is independent?

In general, a good way of getting independent, impartial advice is to pay up front for it. “We define independent advice as someone who isn’t paid commission and who isn’t paid by a third party to sell someone else’s products,” says Westlake.

Another way is to query the range of products and providers which the adviser covers. Quinn Life for example, doesn’t pay commission to brokers, like An Post savings certificates and prize bonds.

Similarly, exchange-traded funds are very low cost funds which can be purchased easily on exchanges, but don’t pay commission.

As Westlake says, you should ask your adviser “under which conditions would you consider those funds and under which conditions would you not consider those funds?” If your adviser isn’t at least referring to such funds, then you would have to question their independence.

How much does financial advice cost?

If you want a fee-based review, the cost will vary depending on the provider and the part of the country you live in. For example, a financial review with Lowe’s firm will cost €250 an hour, with about three hours required, while Westlake says the minimum fee for a review with his firm would be “of the order of about €500”.

If you prefer to go down the old route of getting “free” advice by going to a commission-only broker, remember that there’s no such thing as a free lunch, and there are hidden costs.

“When consumers say I prefer commission because the insurance company pays for the advice, what they’re missing is that the commission comes from product charges – and who pays those? The consumer does,” says Westlake.

“So actually what they’re doing is getting advice up front without paying for it and subsequently paying for it through the product that they buy.”

Lowe agrees. “If you go to an adviser who doesn’t charge you a fee, how are they going to get paid? That’s the question.”

The Financial Regulator recommends that you should check whether your adviser will negotiate fees and commission, and says that they may be prepared to refund you the commission.

Unfortunately, even after all this time, the regulator still does not have a list available for consumers of brokers who operate on a fee-only basis or are prepared to do so.

What is the future for commission-based financial advice?

GIVEN THE propensity for conflicts of interest to arise when financial advisers receive commission from product providers for selling their products, it has been suggested that this distribution method should be banned.

In the UK, the Financial Services Authority has announced plans to ban commission-based financial advice by 2012, which means that financial advisers will no longer be able to earn commission for the sale of financial products such as pensions, life insurance and investment funds.

The issue has also been raised at European level, as part of the European Commission's update on the regulatory framework for packaged retail investment products.

However, such a ban is not on the agenda in Ireland.

Last week, Fine Gael TD George Lee asked the Minister for Finance whether he was planning to introduce a similar ban, "in order to protect investors and savers here from untransparent and unreliable financial advice and the mis-selling of financial and investment product".

Minister for Finance Brian Lenihan said there were "currently no plans to proscribe the use of commissions by financial intermediaries in Ireland", suggesting instead that current legislative protections were sufficient.

He pointed to the fact that sales remuneration and commissions must be disclosed to consumers, under legislation such as the Life Assurance (Provision of Information) Regulations 2001, the Markets in Financial Instruments Directive and the Consumer Protection Code.

However, before the Financial Services Authority recently announced its intention to ban commissions altogether, it required advisers to disclose the commission they received on products. Unfortunately, this was found insufficient to remove the risk of bias completely, which is why it is going down the road of banning commissions outright.

As Marc Westlake points out, if the current measures best protect Irish consumers, then "how do you explain Joe Meade's [Financial Ombudsman] case load?"