10 Tips to spot rip-off financial advice

by Ian Cowie

Monday 29 November 2010

Rip-off financial advice, intended to generate commission for the intermediary rather than gains for the investor, is becoming more - not less - widespread, ahead of the imposition of new rules designed to drive out the cowboys, some experts claim. TheFinancial Services Authority (FSA) will require all independent financial advisers (IFAs) to shun commission payments from product providers and rely on fees paid by investors instead from 2013 onwards. This fundamental change follows an FSA investigation which found that commission payments by insurers, banks and other financial institutions often distorted advice. The FSA's retail distribution review (RDR) will also rquire other changes, such as higher professional qualifications for advisers from 2013.

Now some experts claim the cowboys are making the most of their final months in the 'last chance saloon' to fleece clients before the new tougher regime comes into effect. How can you tell if the financial advice you are given is more likely to benefit your adviser than you? Here are 10 tips to identify warning signs and avoid rip-off financial advice;

*Hello, stranger! If you are contacted by a financial adviser you dealt with in the past but who has not been in touch for more than a year, you might ask why he or she is so keen to do business now. Steve Wilson at Alan Steel Asset Management explained: "The chief executive of a major life company confirms that much of their old book of business is being moved to other providers. Much of it will be for good reasons but investors should think about why they suddenly hear from any adviser out of the blue and why haven't they heard from them for many years?"

*What's in it for me? Or You? Prospective investors should ask advisers how much commission they will receive if any action recommended is taken. They might be shocked by the answer. ……

*Don't be lazy; apparently simple solutions can prove very expensive. ……

*Refuse to be rushed. If your adviser says he or she needs an answer now, then perhaps the answer should be "no, thank you". ……

*Require regular advice - and full disclosure. Mr Wilson said: "It's not unreasonable to expect a financial adviser to review your investments and pensions on an ongoing basis and, if so, tell you what incentives he or she is receiving from product providers. For example, a typical trail commission would equal 0.5 per cent of the value of your investments but many intermediaries are now charging 1 per cent. What are they providing to justify this?"

*What about tax? One way to identify advice that might not be in the client's best interests is to beware changes to portfolios that would incur capital gains tax (CGT) or other liabilities unnecessarily. Why would you want to do anything that transfers more of your wealth to HM Revenue & Customs (HMRC)?

*How are your professional studies coming on? Exams are no guarantee against bad financial advice but investors may ask advisers whether they have obtained the qualifications which will be required by the FSA after 2012 - or are on track to have obtained them by then.

*Beware obfuscation. If you don't understand what your adviser is saying, tell him or her to try again in plain English. Jargon can obscure some nasty surprises.

*If it looks too good to be true, it probably isn't true. Mr Wilson said: "Beware high allocation products which look too good to be true and ultimately try to hide the initial commission. All that happens is the charge is ultimately taken out of the contract over a number of years and back end penalties will apply. Investors should look for a transparent charging structure."

*Remember that 'free' financial advice can prove very expensive; you generally get what you pay for. ……

Quote courtesy of The Telegraph online
Monday 29 November 2010