Shoot down investment cowboys with good financial advice

Where can I go to get good independent financial advice?

That’s a surprisingly hard question to answer.

This is because financial advisers are mostly insurance brokers rewarded via commission.

This means they get a percentage of your investment or insurance premium, and often a surprisingly high percentage that can run to thousands of euros on a large sum.

So how do you know he isn’t steering you into the product that’s best for him rather than you?

The Central Bank this week announced new rules that should bring more transparency to the commission arrangements between financial intermediaries (such as brokers and financial advisers), and product producers (such as banks and insurance firms.

It has been working hard to clean up this murky area but it stops short of an outright ban on commission, as other countries such as the UK have done, or partly done.

But are the latest rules, due to be brought in on April 1 next,  enough? 

Here’s a summary:

• “Freebies” for brokers from finance firms such as golf trips and sporting events will be banned. So you will be less likely to be sold an investment because your advisor is looking forward to a jolly in Majorca paid for by the company you put your money into.

• Brokers will have to publish details of the commissions they receive from product producers on their website.

• Brokers to describe themselves and their regulated activities as ‘independent’ when they trouser commission in return for advice. 

The new rules are welcome - but will they won’t entirely clean up the investment market.

Any advice system based on commission is fundamentally flawed. The Central Bank can tweak its byzantine rules all it wants but people motivated by financial gain will always find ways around them.

The more specific they are the more they can be circumvented.

Brokers may not be able to go on golf trips paid for by insurance companies, any more.

But they could still go to free conferences in the Maldives as long as they “add value for consumers.”

They may have to publish commission details on their website, but will this be buried, incomprehensible or simply too long and boring to read as most ‘terms and conditions’ are?

Brokers – like anyone motivated by financial gain – will find loopholes for money to flow through.

The Central Bank may regulate the hell out of standard financial investment products.

But brokers get around this by selling non-regulated products outside the bank’s control.

We recently highlighted how Irish investors appear to have lost their shirts on a dubious car park investment scheme whose promoter – and the brokers he paid fat commission to – walked away with millions.

The dodgiest unregulated investments are finding their way into the portfolios of clients.

Brokers are increasingly flogging loan notes (basically loans from investors to companies).

These products are not always bad but they are not dubbed “junk bonds” for nothing either and can be risky.

The Financial Times has dubbed the sale of these and other unregulated investments by commission-hungry brokers “the next big mis-selling scandal”.

Is this because the dodgiest companies pay the highest commission to the advisors who tell people where to put their money?

It’s no coincidence that practically the only area where people can get financial advice is the area offering chunky commission to the advisors.

There are few professional financial advisors apart from those remunerated by insurance and investment companies’ commission.

This is partly our fault. There is a kind of conspiracy of convenience between brokers and the public.

We balk at paying a few hundred in upfront fees because we can actually see the money changing hands. We prefer to imagine that the broker is giving us his time and paying for his staff and fancy office for nothing out of the goodness of his heart.

People don’t bother looking into the reams of disclosure data buried somewhere in the transaction that tells us he is going to trouser thousands of your hard-earned savings semi-surreptitiously in commission.

Here’s what you should do:

1. Ask your advisor to explain how he is remunerated and by how much in relation to your transaction

2. Use commission to your advantage. Ask the brokers to pay back some of the commission.

3. If all this is too much of a head wreck just go to a fee-based advisor. 

Yes, truly independent fee-based advisors are few and far between and they do change a couple of hundred euros.

But that is actually a bargain for untainted financial advice when compared to thousands charged in commission for a dubious deal.