Comments on: The food of blogs http://www.gavpolitics.co.uk/blog/2006/03/19/the-food-of-blogs/ English, Rationalist and Liberal Conservative Fri, 29 Aug 2008 07:18:08 +0000 http://wordpress.org/?v=2.0.1 by: AJD http://www.gavpolitics.co.uk/blog/2006/03/19/the-food-of-blogs/#comment-3966 Mon, 20 Mar 2006 08:33:04 +0000 http://www.gavpolitics.co.uk/blog/2006/03/19/the-food-of-blogs/#comment-3966 I don't think there is an easy solution - the financial products are extremely complex (the one I finally went for had terms & conditions of 50 A4 pages of 10pt print) and the market is exceptionally diverse. A non specialist has to have advice. If an expert advises you incorrectly on-purpose, they should be held responsible. We do need regulation, but we need it to: a) work (at the moment it is just a bunch of rules that have to be followed blindly - hence the 'advice' that investments can go up and down on a guaranteed fund) b) be shifted in emphasis, such that personal responsibility plays a greater role. Perhaps the way forward is to regulate the investment information given to clients - and if the clients don't read it, then it is their fault. E.g their should be a summary of all the relevent information prepared by the financial advisor (an assessment of risk, any fees/charges, market value reductions etc...). Basically a clear list of features, spreading no more than a couple of A4 pages. With that document their should be a summary of the clients needs as a comparison (to see financial advisor understands what the client wants and it can be used as a direct comparison). If the summary does not match the product, the financial advisor is libel. If the summary is correct and the client didn't read it/didn't understand it, then it's the client's fault. If it's somewhere between the two, then it's up to the courts to decide. This summary is not currently given - only the document about the clients needs. The tricky thing is if the financial advisor recommends a product that matches all the client's criteria, but is blatently obvious it is a bad bet. For example, investing in corporate bonds when the stock market has been doing badly (especially a few months after a huge fall) is a really bad idea. When investors loose confidence in shares, they buy corporate bonds - which inflates the price! When confidence goes back to shares, the bond price falls. What do you do? My gut feeling is that we cannot regulate stupidity. But incorrect adice, or hiding the important stuff in the small print, has to be regulated. I don’t think there is an easy solution - the financial products are extremely complex (the one I finally went for had terms & conditions of 50 A4 pages of 10pt print) and the market is exceptionally diverse. A non specialist has to have advice. If an expert advises you incorrectly on-purpose, they should be held responsible. We do need regulation, but we need it to:
a) work (at the moment it is just a bunch of rules that have to be followed blindly - hence the ‘advice’ that investments can go up and down on a guaranteed fund)
b) be shifted in emphasis, such that personal responsibility plays a greater role.

Perhaps the way forward is to regulate the investment information given to clients - and if the clients don’t read it, then it is their fault. E.g their should be a summary of all the relevent information prepared by the financial advisor (an assessment of risk, any fees/charges, market value reductions etc…). Basically a clear list of features, spreading no more than a couple of A4 pages. With that document their should be a summary of the clients needs as a comparison (to see financial advisor understands what the client wants and it can be used as a direct comparison).

If the summary does not match the product, the financial advisor is libel. If the summary is correct and the client didn’t read it/didn’t understand it, then it’s the client’s fault. If it’s somewhere between the two, then it’s up to the courts to decide. This summary is not currently given - only the document about the clients needs.

The tricky thing is if the financial advisor recommends a product that matches all the client’s criteria, but is blatently obvious it is a bad bet. For example, investing in corporate bonds when the stock market has been doing badly (especially a few months after a huge fall) is a really bad idea. When investors loose confidence in shares, they buy corporate bonds - which inflates the price! When confidence goes back to shares, the bond price falls. What do you do?

My gut feeling is that we cannot regulate stupidity. But incorrect adice, or hiding the important stuff in the small print, has to be regulated.

]]> by: Gav http://www.gavpolitics.co.uk/blog/2006/03/19/the-food-of-blogs/#comment-3954 Sun, 19 Mar 2006 20:41:03 +0000 http://www.gavpolitics.co.uk/blog/2006/03/19/the-food-of-blogs/#comment-3954 I think you have illustrated my point. No IFA can be truly independent because of the financial rewards. Not only that, but IFAs have to sell a reasonable number of products to make a living so they are unlikely to spend as much time researching as you would for yourself. That you <em>then</em> had to read the literature before finding out the IFA was lying/a fool shows even more how little faith you can safely rest on their shoulders. How much better would it be if we stopped telling people to trust a complete stranger with a conflict of interests and told them to spend a few hours researching for their own investment? I accept that this is hard to do because of the complexity of financial products and the near-impossible task of predicting future investment returns, but it has to be better than continual scandals which can fairly be levelled at someone else. Personal responsibility must become a factor (which it isn't now). I think you have illustrated my point. No IFA can be truly independent because of the financial rewards. Not only that, but IFAs have to sell a reasonable number of products to make a living so they are unlikely to spend as much time researching as you would for yourself.

That you then had to read the literature before finding out the IFA was lying/a fool shows even more how little faith you can safely rest on their shoulders.

How much better would it be if we stopped telling people to trust a complete stranger with a conflict of interests and told them to spend a few hours researching for their own investment?

I accept that this is hard to do because of the complexity of financial products and the near-impossible task of predicting future investment returns, but it has to be better than continual scandals which can fairly be levelled at someone else. Personal responsibility must become a factor (which it isn’t now).

]]> by: AJD http://www.gavpolitics.co.uk/blog/2006/03/19/the-food-of-blogs/#comment-3953 Sun, 19 Mar 2006 18:29:14 +0000 http://www.gavpolitics.co.uk/blog/2006/03/19/the-food-of-blogs/#comment-3953 *correction* Parageaph 3: All of this was in the small print of the 1cm thick bruchure and <strong>not</strong> in the summary the IFA supplied or the cover letter, which clearly stated this produce was the best on the market considering my criteria. *correction*
Parageaph 3:

All of this was in the small print of the 1cm thick bruchure and not in the summary the IFA supplied or the cover letter, which clearly stated this produce was the best on the market considering my criteria.

]]> by: AJD http://www.gavpolitics.co.uk/blog/2006/03/19/the-food-of-blogs/#comment-3952 Sun, 19 Mar 2006 18:25:59 +0000 http://www.gavpolitics.co.uk/blog/2006/03/19/the-food-of-blogs/#comment-3952 Gav - there is mis-selling in the financial sector. I should know - I could have been a victim of it! A couple of months back I wanted to invest some money (quite a lot due to the sale of my flat). I went to four high-street names and two independent financial advisors. In two of the six meetings, I could easily have been mis-sold a product, as not only did the financial advisor's match me to a product that didn't conform to my clearly explained criteria, both of them even lied to me. My criteria: A safe investment (with capital guarantee) that is compatible with my tax position (as an ex-pat I don't pay any UK tax, so I wanted a fund that I am responsible for declaring to the inland revenue, not the company) but gives me exposure to the stock market (try to get some growth) and has low fees. No exit charges or market value reductions (aka exit charges). The investment period would be 5 years. Meeting 1: IFA Advice: Off-shore investment fund (stock market tracker) with no capital guarantee, a 5% up-front fee (half of which went to the IFA) and an annual fee of 2.5% (half of which went to the IFA). I did a calculation that if the fund grew by 9% per year, it would take me almost 3 years to get my original investment back. But - there were exit charges. Year 1: 10% of returned money, year 2: 8%.... etc until after year 5. So in effect, if I wanted to get my money back due to a change of circumstances, I would get back less than I paid in. All of this was in the small print of the 1cm thick bruchure and in the summary the IFA supplied or the cover letter, which clearly stated this produce was the best on the market considering my criteria. Meeting 2: Halifax Advice: Guaranteed investment fund (passively managed fund that included shares). There was a capital guarantee, it was over 5 years, the fees were 1,5% per year with no up-front or exit charges. I would receive the money in the bond tax-free. BUT - it was tax free because the tax was already removed at source! The way it works is that the Halifax pay tax (20%) on the profit from the whole investment (of every customer that invested in it) before the profit gets added to the investment. Considering how compound interest works, that is extremely damaging to the final ammount! Not only that, but the financial advisor clearly misled me - I would not be taxed when I cashed in the fund, as it had already happened! The really amusing thing was that all of the financial advisors, bar one (the other IFA - who I went with) kept telling me that investments can go down as well as up. But I was talking about a guaranteed capital investment, so if the investment lost money, the worst that would happen is I would get the original lump sum back (no fees removed) - which would effectively mean I would not be protected against inflation. There is a case for regulation, as extremely complex products are completely mis-sold by bafoons (halifax - he didn't intentionally lie to me, just his complete stupidity led him to make assurances that were not true) and liers (the IFA). Unfortunately, the regulations are not working! Gav - there is mis-selling in the financial sector. I should know - I could have been a victim of it! A couple of months back I wanted to invest some money (quite a lot due to the sale of my flat). I went to four high-street names and two independent financial advisors. In two of the six meetings, I could easily have been mis-sold a product, as not only did the financial advisor’s match me to a product that didn’t conform to my clearly explained criteria, both of them even lied to me.

My criteria:
A safe investment (with capital guarantee) that is compatible with my tax position (as an ex-pat I don’t pay any UK tax, so I wanted a fund that I am responsible for declaring to the inland revenue, not the company) but gives me exposure to the stock market (try to get some growth) and has low fees. No exit charges or market value reductions (aka exit charges). The investment period would be 5 years.

Meeting 1: IFA
Advice: Off-shore investment fund (stock market tracker) with no capital guarantee, a 5% up-front fee (half of which went to the IFA) and an annual fee of 2.5% (half of which went to the IFA). I did a calculation that if the fund grew by 9% per year, it would take me almost 3 years to get my original investment back. But - there were exit charges. Year 1: 10% of returned money, year 2: 8%…. etc until after year 5. So in effect, if I wanted to get my money back due to a change of circumstances, I would get back less than I paid in. All of this was in the small print of the 1cm thick bruchure and in the summary the IFA supplied or the cover letter, which clearly stated this produce was the best on the market considering my criteria.

Meeting 2: Halifax
Advice: Guaranteed investment fund (passively managed fund that included shares). There was a capital guarantee, it was over 5 years, the fees were 1,5% per year with no up-front or exit charges. I would receive the money in the bond tax-free. BUT - it was tax free because the tax was already removed at source! The way it works is that the Halifax pay tax (20%) on the profit from the whole investment (of every customer that invested in it) before the profit gets added to the investment. Considering how compound interest works, that is extremely damaging to the final ammount! Not only that, but the financial advisor clearly misled me - I would not be taxed when I cashed in the fund, as it had already happened!

The really amusing thing was that all of the financial advisors, bar one (the other IFA - who I went with) kept telling me that investments can go down as well as up. But I was talking about a guaranteed capital investment, so if the investment lost money, the worst that would happen is I would get the original lump sum back (no fees removed) - which would effectively mean I would not be protected against inflation.

There is a case for regulation, as extremely complex products are completely mis-sold by bafoons (halifax - he didn’t intentionally lie to me, just his complete stupidity led him to make assurances that were not true) and liers (the IFA). Unfortunately, the regulations are not working!

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