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Tuesday 9 October 2012

Journalist horror story: how to silence ‘half-truths’ before they start to spread doubt into the unsuspecting public



In the last few weeks I have seen a few blogs. A couple by Ian Cowie of the Daily Telegraph have concerned me. The problem is that what he prints is not untrue but it paints a much distorted picture. I could say I bought a car with four wheels and it was a con. This could be true but there is a lot missing from the story before any decision can be made.

His latest article states that most IFAs rely on commission paid to them by the insurers and fund managers rather than charging the clients a fee. He then goes onto to compound this by using the example of hidden charges on unit trusts and OEICs. He points out the transparency of other forms of investment but to be fair you don’t get to the bottom of the article because the damage is done. This is the same journalist who claimed that IFAs who do nothing will continue to take in their commission.

None of this is untrue but it is clearly half-truths and an easy way to draw in the public to hate commission hungry sales people. 

Let me explain where I think his thinking comes from. Over ten years ago I worked for a couple of insurance providers. I saw two cases which made me feel really uncomfortable. The first was a financial adviser setting up a group personal pension scheme where he was set to receive £100,000 plus up front and around £100,000 a year. The second was a financial adviser who transferred a client out of the British Airways Pension Scheme who took £35,000 in commission and a further £35,000 from the two unit trusts the money was invested in.

To some extent that painted my view of financial advisers and this was compounded by what I read in the papers. 

In reality this was over ten years ago and what journalists like Ian Cowie seem to have missed is that in the last ten years (and possible more) a lot has changed. In the last four years I have done a lot of research into this market and below are two key observations:

Financial Advisers

Many financial advisers, or financial planners as I prefer to call them, have moved across to a fee structure. This structure can differ from financial planner to financial planner but it can be a retainer fee of say £30 per month and possible a percentage fee for managing assets, it can be a percentage fee for managing assets or it can be an hourly fee. 

For many financial planners who have moved across to this way of managing their clients they use what is called a wrap platform (a point Ian Cowie seems to have missed). This is in many cases the most transparent way to manage client money. For a fully transparent platform they ensure any rebates from fund managers come back to the clients. So effectively taking Ian’s example a fund charging 1.50% may have a rebate of 0.75% which comes back to the clients cash account. 

There are arguments as to how this should be used and the FSA argue that this is incorrectly being used to cover fees. I would argue against that because once you move down this route then actually everything is transparent and the clients in many cases are happy for this to cover the cost of the advice.

And remember ultimately the platform is the end solution; the financial planner will have worked from what the goals are and then delivered the solution at the end. 

I will cover costs at the end because this again is a flaw in Ian Cowie’s argument. 

DIY Investors

Ian Cowie talks a lot about ‘free financial advice’. I notice one of the comments from janetjH on his blog about “the good thing about managing your own affairs is that you are not paying hidden charges to people who couldn’t care less about your future”. 

Let’s stop; this sounds like ‘free non-financial advice’. I go to a “free” platform. There is no upfront charge for buying funds and in some cases I may even get a slight discount on the fund. Say a 1.5% fund is charged at 1.35%. So I am getting 0.15%. So actually I feel like I am getting something for free.

Let’s go back to what Ian Cowie is saying, many OEICs / Unit Trusts pay rebates. If you go direct who get these? How do the direct platforms make their money? 

Before I answer this consider iii.co.uk who recently said that they would move to a fixed quarterly charge of £20 and pay any rebate back to the client cash account which could then be used to fund the charge. There were cries of disgust that they were now charging for the service but hang on they always were.

So going back to the question I have heard some direct platforms are receiving up to 1% in rebates so even if they give back the client 0.15% they are taking 0.75%. This doesn’t sound free to me. 

Direct platforms do not need to change their practice until at least 2014. It also appears that if clients stay in a rebate paying fund then the direct platform can continue to take those healthy rebates. 

This is something journalists should be investigating.

Comparing costs

For nearly five years we have adopted a fee structure of up to 1% of the assets managed. We may also charge up to 1% for new money. All fees are agreed up front with the client.

I had a look at one of our solutions and the maximum cost would be around 2.05% p.a. (so on £250,000 this would be £5,125 p.a.). This covers the cost of the platform, the investment and our fees. If we build in the additional expenses of the funds this will add a further 0.19% or £475 p.a. 

Now if I build the same portfolio with a provider that has no rebates the charge on the same portfolio would be around 1.50% p.a. (so on £250,000 this would be £3,750 p.a.). Again you need to build on the additional expenses of £475 p.a.

So the difference in cost is around £1,375. The question is what you get for this additional cost? For many this is peace of mind, and this peace of mind of mind is delivered via the service proposition. Financial planners look at the whole picture and not half a picture as journalists tend to have a habit of doing.

Don’t get me wrong Ian Cowie has done nothing wrong but he needs to be careful about painting half a picture and actually consider how he can help the public as we move to these changes in 2013.


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