# Should "independent financial advice" be mandatory in financial services industry?



## Yellow Belly (3 Mar 2009)

When anyone is purchasing a property- we are obliged to get independent legal advice while signing all documents for mortgage & conveyancy.

Is there any credence is having an obligation to get "independent financial advice" when purchasing all financial products?

I am not speaking about independent financial advice as portrayed by todays advisors or brokers. Moreover advisors who CANNOT hold agencies or submit business to any financial institutions- they must be qualified to minimum QFA standard of education, operate purely on an advisory basis. There main functions would be as follows:


Ensure client really is getting the product that suits his needs
Ensure that the client has been made aware of all risks, charges, commissions or conflicts of interest involved
Ensure client is aware of the future financial consequences of this purchase
Monitor the modus operandi (from the type, nature & costing of products offered to clients) of each financial institutions, and make regular independent reports to the relevent regulatory & consumer bodies. This would include reporting such things as "dangerous  lending", excessive commissions & charges, failure of broker or institution to disclose aspects of products & also pointing out the downside or pitfalls to each customer.
These advisors would be paid a fee in the same way that solicitors are remunerated (albeit) at a more realistic level!!! Alternatively perhaps there could be an industry levy applied to all financial institutions to fund such a "police style" system.

Surely a system such as the above would have some place in the financial services industry going forward to ensure that we don't end up in the same mess again. This is also considering the current system of regulation clearly doesn't work, and if my suggestion prevented even one house repossession in the future, or indeed one case of mis-selling, then it would surely be worth the effort & cost?

I would be delighted to hear other opinions?


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## Sumatra (3 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*

There has always been a search for independent advice.

When you think about it, what you are asking is a mutation on typical human behaviors. I'm not talking Darwin but what you are looking for is someone having a sense of fairness and sincerity and you are also hoping that person will also act truthfully and honestly when you dangle a wad of your cash in front of him / her. I think it will take about a million years before we have evolved to a sufficient degree to enable the compiling of a list of 'truly independent financial advisers'. Until then there are only one or two good ones but no independent ones.


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## Mpsox (3 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*

its an interesting concept but with some pitfalls

firstly who picks up the cost. If the financial institutions do, they will simply look to pass it on

secondly who regualtes the advisors and makes sure they are competent

Thirdly, how do you define excessive charges, many sub prime deals may seen to have a high interest rate but perhaps they also reflect the increased risk the lender is taking on


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## Yellow Belly (3 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*



Mpsox said:


> its an interesting concept but with some pitfalls
> 
> firstly who picks up the cost. If the financial institutions do, they will simply look to pass it on
> 
> ...


 
The cost would most likely be borne by the consumer as with legal fees. There is the option to use an industry levy to part fund these costs- I know it may be passed on or is an extra expense on the consumer but if it was for the consumers protection then how much would it save him long term. For example- legal fees are accepted in a property purchase, why not advisory fees in a financial purchase- same principal

Advisors as I have put forward would be nothing like those of today- in the model that I am thinking about- the advisor cannot advise clients on which institutions to use or receive commissions at all. They could only advise on the financial contract attached to each product being purchased & comment on the merit, risk element & cost of only that contract to the client.

Agreed that sub prime is more expensive- how many borrowers have given any thought to EXACTLY what they are doing when they take loans from sub prime lenders? That is partly the reason why over 80% of repossessions are in this sector. I think it should be imperative that borrowers be advised exactly how much this is going to be on a monthly basis, and exactly how much it will increase to with an interest rate increase- if they wish to pursue the offer then they only have themselves to blame. Other areas of excessive charges could be where customers are sold non standard PRSA's with up to 25% initial commission where a standard PRSA would only have 5%, or other areas where additional allocation on investment funds could or should be applied for larger amounts but this is ommitted on the policy document.

This is only an idea I have regarding a model that would best protect consumers so any changes or flaws that anyone wishes to point out may be useful.


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## Damian85 (4 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*

It does present a very interesting concept. However, it seems the idea of an independent financial advisor is unknown in Ireland and the UK. Perhaps a potential niche in the market place???

I don't know if it would be entirely value adding for an individual in their investing activities. Yes, while consumers may be protected from misselling, it may be a non runner as demand for such a prerequisite may be low. The risk of being missold a product may underweigh the cost involved.

For groups with little financial expertise and who are responsible for other peoples' money, this would be an excellent approach. I would see it as an excellent concept for directors and management of non profit organisations such as charities and credit unions, especially when they lack the financial expertise due to their voluntary formation. Brokers may see a lot of these bodies as 'sitting ducks'. It would prove very useful as it may decrease the risk of misselling and prevent unsuitable risk taking. The financial advisor may also serve as a control mechanism so investing decisions could be rationalised and justified.


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## roro123 (4 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*



Yellow Belly said:


> There main functions would be as follows:
> Ensure client really is getting the product that suits his needs



How can you ensure the client "really" gets a product that suits their needs? Take an investment that may have been made last year or the year before. If you had a customer who wanted to beat inflation and interest rates, what would you have "advised" - Perhaps a financial product that offers either a better return than cash, something perhaps with a fixed term and something perhaps with a capital guarantee. - does this sound like a reasonable advice? You would take into account his current needs and ability to manage his outgoings , be sure perhaps there is adequate provisions made for perhaps pension, income protection,health insurance, illness cover, life insurance, spare cash, "current" dependants, his age, their age? The list goes on. At least the advice wasn't to get into property or direct exposure to say bank shares etc. Sounds reasonable in hindsight, perhaps at the end of the fixed term the clients investment may indeed beat inflation and interest rates offered on cash.How do you know if the client gives you all the relevant details. They wanted to invest 100k. That was their aim, now they need to be asked far more personal details than they expected when they arrived for the independant advice. Something that makes people suspicious especially when there is money involved

Now fast forward to 2009 , and the client says , "I'm glad I got that independant advice , I didn't buy an investment heavily exposed to equities, or property, my money is safe" , but then unfortunately within a matter of months, his once profitable business goes to the wall, his elderly mother suffers a stroke and he as the only next of kin needs to cover the cost of elderly care, or try to make structural adjustments to her home so that she can function to some degree. The client looks at his financial circumstances and notices that his needs have changed very quickly. His outgoings are fairly high because he has a mortgage,a pension, income protection,health insurance, illness cover, life insurance premiums which was advised to him to protect him from any unforeseen circumstances are now being paid out of his account. His income is dried up since the business went to the wall, his "adequate" spare cash is going towards paying his way, feeding his kids etc. He calls you up and says, that safe investment I made which has a capital guarantee and that protects me from the current underperformance of the stock and property markets, well I need access to those funds just to get by. Can you encash it and send me the cheque?
The independant adviser says , "but it only offers the Capital Guarantee on maturity and if you try to encash before that, then you will be exposing yourself to losses by breaking the fixed term, you won't get back at least what you put into it. He says " but my mother and my business etc etc" And you say....what?

Needs change. You can't tell the future. You can guess, and at the time I advised you to go with the product, my intention was the same as yours (or another way to put it, is "my guess is was as good as yours") that even if the returns weren't guaranteed at least you have the capital security. We both expected nothing unforeseen to arise and we thought you put enough spare cash aside so you could manage if any unforeseen circumstances arose. He gets angry, seeing that he's had a string of bad luck recently and this news just makes him more desperate. His perception was that his money was safe, he knew that returns weren't guaranteed but that the capital was secure, but now he needs access to his hard earned cash. What's he going to do? Take the hit and encash, or make life as difficult for you as it has been for him. He's going to claim that it was missold the product because he "was of the impression" that his money was safe at all times, and that he was aware that the capital guarantee was at maturity but his perception was that the investment never went below what he put in, so naturally enough his "expectation" was that he never would need access, but sure it couldn't be actually worth less within the fixed period, could it?



Yellow Belly said:


> Ensure client is aware of the future financial consequences of this purchase


Can't be done, unless you have a crystal ball.



Yellow Belly said:


> Monitor the modus operandi (from the type, nature & costing of products offered to clients) of each financial institutions, and make regular independent reports to the relevent regulatory & consumer bodies. This would include reporting such things as "dangerous lending", excessive commissions & charges, failure of broker or institution to disclose aspects of products & also pointing out the downside or pitfalls to each customer.



I know its laughable now but that is the Financial Regulators job.

The bottom line is that nobody can tell the future, even indepedent financial advisers. I independently advise myself on everything from investing in financial products , to what car is the most reliable, to where best to buy my home etc. If I was a regulated entity I would have lost my licence by now just listening to my own predictions....
Life is all about risk and reward. That piece of junk car I bought last year because it had bluetooth is a testament to that! You'll never hear any complaints about investments that outperform. 
If this idea was "obligatory" , then I would instantly be priced out of the market , because the fees paid either by me to get this advice or the levy charged to the banks to service this would ultimately be priced in and increase the cost of entry and perhaps make me decide to go it alone and takes me chances, or perhaps take a chance on investing the money in a less nanny state market like the Caymans, or the Channel Islands where it would be less hassle and more accessible just to do what I wanted.

I understand from your posts, that you are looking for a Utopian solution to the anarchy of finance. Its not possible and never has been. You can put safeguards in place to protect people from wholly unsuitable products and services but you can't regulate the clients ever changing needs. 

I would argue that even the presence of an adviser or broker or consultant or whatever, independant or not would actually give a client a false perception that somebody else has a stake in the performance or suitability of a product and let their guard down or lift any self doubt about whether they are  doing the right thing, never mind the extra bombardment of financial advice and jargon around other financial products that may be required. People also hear what they want to hear no matter what advice is given. My own mother told me that my girlfriend was not suitable for her son and she had her doubts, now we are happily married, should I have listened to her advice? Who knows? Maybe my needs will change and she may be proved right, but my instinct is she was wrong on that one, but you never know, my mother was always telling me that her friends ************************* daughter who was "much the same age as me, would be a reliable steady woman worth marrying", last I heard she was in prison for drug offences. 
Seems like "past performance isn't a guide to future performance"should be written into everything.


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## Yellow Belly (5 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*

Hi Roro- thank you for your input.

I don't think you are following what I am getting at in essence though? I agree with all you have said with regard to everyone (even your own) inabillity to predict the future. For anyone reading who thinks they can do this- then perhaps you can post a few winners for Cheltenham next week!

Like I say Roro I do agree with alot of what you are saying, however how many people have had the risks attached to any investment fully explained to them? I have no sympathy for anyone who cries over spilled milk when they were aware that there was milk in the jug & no lid! But how many people were ever told by the product sales person at the time they were getting them to sign the proposal form that they could lose EVERYTHING? In most instances they were too busy showing the past performance graphs etc.

How many people should never have been in unit linked equity type investments in the first place? 
Would it not be benefitial to have someone "independent" of the sales process there to outline the actual risks involved (this doesn't require the ability to predict the future) just the ability to re-enforce the "past performance isn't a guide to future performance" mantra.
In the same vein- whydo we need to use a solicitor for advice when purchasing a house? You could say that everyone knows the risks involved so why then do we need the solicitor at all? In most cases if there is ever to be a problem with any house purchase in the future it will be a mortgage problem (therefore a financial problem) rather than a legal one- but where has the purchaser received any independent financial advice at the time of purchase?

You seem to have a reasonable understanding of the financial industry (albeit a more than slightly cynical one), and you have admitted to making errors- how do you think that the vast majority of people (who in many cases have a very limited financial knowledge) fare in their purchase of financial products? Surely there should be some form of "actual" regulation on ground level for these people & my suggestion are "independent advisors" outside of the sales process. These people could operate at ground level on financial issues like solicitors do on legal issues. You say that this is the job of the financial regulator I agree but that is like saying that the law society should regulate legal issues without having solicitors at ground level?

I probably am looking for a UTOPIA of proper advice, but to be honest now that we are aware the the model of how advise is dispensed is flawed any improvements would be of benefit to all. Shoot for the stars & maybe just make it higher than our current standard?

Thank you again for your input.


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## NorthDrum (10 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*

Yellowbelly, I see what you are getting at, but part of the problem is like what roro123 said. 

You can educate and advise in the best possible way with the best intentions, but some people hear what they want to hear and takin the information that suits them. Most Investment material has "past performance is not a reliable guide to future performance" which I find funny considering we then show people graphs of past peformances . . 

There is no way of predicting fund performances or changes in peoples cicumstances. Like life, you can only go on the information you have at any one time and work with it.

I have no doubt that many people in the past were mis-sold products, but I also have no doubt that many people have policies they just didnt bother trying to understand (even if they were informed of its ups and downs).

Not normally one for defending solicitors, but in all fairness, that job where they do the research to make sure that your property isnt double owned (and owned by sellor) is vital. If you are spending hundreds of thousands on an investment, I always think professional assistance is worth having.


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## Damian85 (23 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*

I've recently heard about a reverse mortgage product being offered in the United States. Basically, it allows usually older people to get a lump sum payment for their home and also the right to occupy the home until their death.

There is an interesting point from this - Many states are now making it a compulsory regulatory requirement, that people who are seeking to apply for a reverse mortgage must consult an independent expert before any contract is signed. The independent expert reviews the draft contract and explains the concept of the reverse mortgage to the client. The providers of reverse mortgages cannot enter into such a contract until verification from the independent expert is then received.


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## LDFerguson (24 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*

This sounds very like the various equity release schemes available to older Irish homeowners. All of them require that the homeowner must get independent legal advice before proceeding.


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## Timbo (24 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*

Independent advisors are around and always have been.

In the real world though, people like to get something for nothing, even to the extent they pretent they are getting something for nothing when it should be obvious they must be paying indirectly (all those mortgage brokers work for "free").

Simple fact is peple won't want to pay and you will get some box ticking service at absolute minimal cost. Worse than no advice, which at least would save the regulatory cost.


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## Yellow Belly (24 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*



Yellow Belly said:


> When anyone is purchasing a property- we are obliged to get independent legal advice while signing all documents for mortgage & conveyancy.
> 
> Is there any credence is having an obligation to get "independent financial advice" when purchasing all financial products?
> 
> ...


 
Thanks everyone for you input thus far.

I think I need to reiterate that the "indepedent advisor" which I am speaking about would be a totally different animal to that which carries this prefix up to now. In my proposal I would attach the name "broker" or "sales person" to all of the advisors of today- with "independent advisor" an almost "policing or monitoring force" to ensure that the products being "sold by brokers" are indeed what the clients/purchasers really think they are.

From experience the vast majority of "average consumers" are quite financially unaware- who is supposed to assist them in their financial purchases- surely we can't continue with the current system of so-called advisors- many of whom are merely sales people?

Does anyone else have any suggested system to assist people?


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## Damian85 (24 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*

There is an excellent niche in the market for such a concept. As I said before, it would probably be more suited to groups such as credit unions, trusts or charities rather than an individual investor.

Perhaps the financial regulator could drive such an initiative (and obtain some badly needed reputational improvement at the same time!).

Individuals in a capitalist society are willing to take certain risks, but an attitude change may occur in light of everything that has happened. Investors may see the independent financial advice fee (whether borne at their own expense or passed on indirectly by the product producer) worth paying to ensure a reasonable level of due diligence and comfort.

If such a requirement was to become mandatory, it would have to have some level of credibility and not just become a meaningless activity.

The niche in the market for truely independent advice is something which could grow in the coming years.


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## rmelly (24 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*



Damian85 said:


> If such a requirement was to become mandatory, it would have to have some level of credibility and not just become a meaningless activity.


 
Starting to sound like another indirect tax to me, if mandatory for individuals.


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## roro123 (24 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*



Yellow Belly said:


> Thanks everyone for you input thus far.
> 
> I think I need to reiterate that the "indepedent advisor" which I am speaking about would be a totally different animal to that which carries this prefix up to now. In my proposal I would attach the name "broker" or "sales person" to all of the advisors of today- with "independent advisor" an almost "policing or monitoring force" to ensure that the products being "sold by brokers" are indeed what the clients/purchasers really think they are.



All financial products sold in this country need approval from the Financial Regulator already. What "clients really think they are" is so varied, would your new type of advisor be liable in anyway to compensate someone who they approved as suitable , yet economic or life circumstances changing contributed to the product becoming unsuitable? 
A better approach is to look at the bigger picture. Look at the range of products that were sold where the consumer is currently suffering shortfalls or losses or crippling debt. These (for the most part ) are not due to misselling or unsuitablity but as a result of National or International economic mismanagement. 
For instance, if the Irish Government introduced measures that cooled the property boom when it was getting well over the top (managed the economy) then prices would have been less over inflated and the mortgages sold would have been more manageable for quite a lot of people still. As regards investments, these would have no doubt gone through a cyclical downturn, but if International Governments had put measures in place to dissallow the overinflation of asset prices relative to the money supply and real intrisic value of assets rather than derivatives of assets, then perhaps the short term gains would not have been as flash as they were but then the fall off would not have been so devastating either.
If you are talking more about protection products that were sold where they were not good value to begin with, or missold or the client thought that they covered more than they did, then yes your idea has some merit, but the difference with those products is that they normally don't have a large outlay to begin with. A friend of mine recently got laid off and was kicking himself for cancelling his income protection policy last year, because he thought that if he had it now he would get some value from it.- This guy is financially savvy to, but in his current circumstances his view was distorted. When I mentioned it only paid out if he was unable to work due to illness, then he did the Homer Simpson classic " Doh!".

But in the case of other factors outside of our control , like the Financial regulator currently, the new style advisors will look just as inept and with major egg on their faces the next time something occurs that works against consumers. 

You probably should coin the phrase "Financial Counsellors" rather than "Advisors", and perhaps there is merit in having a Financial NCT done every year, but in all honesty your plan will inevitably create a layer of cost on top of the other layers that exist. The best way to have protected consumers is to have educated consumers. Personal Financial Management might be a good second level class to offer students. They could learn about what financial products they will most likely avail of when they start on the ladder and what all the jargon means.


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## Sumatra (31 Mar 2009)

*Re: Should "independent financial advice" be mandatory in financial services industry*

Definition of independent is " free from external control and constraint."

If an intermediary cannot achieve independence themselves then surely a consumer can't expect to be the recipient of independent advice.


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## thedaras (9 Dec 2011)

Hi, This is obviously an old thread,but I saw this and it may be of interest;

http://www.skynews.com.au/businessnews/article.aspx?id=693408&vId=



> HSBC fined $16m after missold advice


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