Absurd Advice

By co-incidence a new client (let's call him MM) has recently been in touch about their experience with the same high street bank as my last entry.

MM is 65 and has recently emigrated to the UK with his wife and they have no more than £40,000 to their name.

MM has found employment and they are presently renting and reviewing their options. MM is a basic rate taxpayer and his wife a non-tax payer.

When considering what to do with their £40,000, they visited the bank to seek advice. The adviser in the bank recommended that the whole amount was invested into an investment bond, which by the way would have paid the bank commission of £2,800 (i.e. 7%).

MM was a little uncomfortable about this advice and decided to seek a second opinion from me.

I told MM not to proceed with the investment on the grounds that:

a) this was all the money they owned and it needed to be kept safe, and hence should be in a high interest building society account in MM's wife's name, so the interest would be received without being taxed.

b) even if they were to invest any of it, an investment bond was completely the wrong vehicle as:

i) the underlying life assurance investment funds were taxed within the fund at broadly the basic rate. Why invest in a taxed fund? It is far better to invest in an unit trust (perhaps via an ISA) where the fund is not taxed internally.

ii) the investment bond has hefty surrender penalties over the first 5 years (due to the big upfront commission payment). It is much better to invest in something with no surrender penalties and a small initial charge. Indeed, there are some products with no initial charge called stakeholder savings (http://www.stakeholdersaving.gov.uk).

The message that is becoming clear is that anyone seeking advice from a high street bank on the investment of a lump sum, should always consider seeking a second opinion from a fee-based adviser that works on an hourly rate.

The other message appears to be that investment advice provided by high street banks is driven by the products paying the best commissions, which is rarely (if ever) in the best interests of customers.

Absurd Commissions

Earlier this week a client (let's call him BH) telephoned me to tell me about his experience with one of the top 4 high street banks.

BH is approaching retirement and will have sums of around £200,000 available to invest to supplement his income in retirement. He thought he would test the bank to see what they had to say before asking for my advice.

The financial adviser in the bank recommended that BH should invest £150,000 of that sum into an investment bond.

BH took care to look through the product literature and was shocked to see that such an investment would give rise to a commission payment to the bank of £10,500, equating to 7% of the investment.

We joked that, based on my hourly rate of £130, I would have to do 80 hours of work for BH (equivalent to 2 whole weeks) to justify such a payment.

By comparison the bank adviser was hoping to do no more than perhaps 3 or 4 hours.

In short, the amount of commission that would have been paid is completely disproportionate to the amount of time that would have been spent by the adviser working for BH.

Needless to say, by consulting a fee-based adviser working on an hourly rate, BH is going to save thousands of pounds in unnecessary costs.

The message here is that if you need advice regarding a large lump sum, you should only be speaking to fee based advisers that work on an hourly rate.

TCF Mantra

To: john.lappin@centaur.co.uk
Sent: Friday, December 08, 2006 1:13 PM
Subject: TCF Mantra

Hi John,

I have been reflecting upon my letter in your 30 November edition - "Value does not depend upon how we are paid", and Nic Cicutti's thought provoking piece in your 7 December edition - "Boggy trail".

It strikes me there is plenty of scope for financial advisers to receive payments that are disproportionate to the amount of work they do for their clients, by way of fund based renewal commissions as well as initial commissions.

Perhaps the mantra should be:

"relate the work you do to what you are paid and vice versa".

For instance, at the beginning when investments are initially made, that usually means rebating commissions so that what you receive matches the amount of work you have done.

Later on, when funds (& renewals) accumulate, that usually means moving to 6 monthly review meetings instead of annual ones (i.e. improve your service in line with higher renewals), or at the very least treat the client to a very nice lunch or a weekend break.

Kind regards,
Robin