Re: Should "independent financial advice" be mandatory in financial services industry
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?
Ensure client is aware of the future financial consequences of this purchase
Can't be done, unless you have a crystal ball.
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.