The basis of “best advice”
Imagine a world without choice. A world where the settings are all the same. Where we all drive the same car: a two-seater convertible. Where restaurants all serve one meal – soup. Where we all live in identical two bedroom apartments.
But what happens if I have to transport more than two people, or if I want a steak, or if I have two children? How would you feel if the answer was, “Sorry, that’s all we offer.”
Essentially, it’s the same with investing.
For years the world of investment advice has been dominated by advisory firms that are either owned by, or closely associated to, major financial institutions. What this leads to is advisers selling the same product to a wide variety of different people, regardless of their personal circumstances, age or risk profile. No one company can have all of the right answers all of the time.
In many cases, financial advisers will tie themselves to a specific institution (tied) or group of institutions (multi-tied) due to the enhanced commissions that are then on offer. Although there is draft legislation proposed in the RDR (Retail Distribution Review) discussion document, as yet this is still a fairly unregulated area, and as such is open to abuse.
There are also certain ownership structures that perpetuate conflicts of interest for financial advisers, and clients would do well to ask the hard questions. Commissions unfortunately often pay a role in advisers’ decisions, and this too should be carefully monitored.
Ideally, financial advice should be given on a fit-for-purpose approach. Firstly, the client’s needs and goals should be fully understood, with a specifically crafted solution being built that will meet their long-term needs and objectives. Secondly, clients should be aware of all fees in the solution – investment funds that charge upfront fees generally do so to fund adviser commissions and this can impact on the returns.
Before making a decision, you should always ask for the full details, including shareholdings, upfront commissions, or special relationships. It is always good to get a second opinion, so get more than one proposal. Don’t be afraid of asking for the best of both solutions. If your adviser is truly independent, they will be able to accommodate your selections.
Always understand why a selection was made. If a fund is supposed to be ‘better’ than its competitors, ask for the comparisons so that you can make an informed decision.
Remember it’s your money, you worked for it. Don’t be overwhelmed by the technical mumbo-jumbo. Ask for a number of opinions, understand each solution fully, and then make your own, truly independent decision.