It's not been a great start to 2011 for the banks in terms of fines for the advice they have given. Â Barclays were walloped Â£11m by the FSA but agreed to settle in advance for Â£7.7m for advice relating to two Aviva funds of the Global Balanced Income Fund as well as the Global Cautious Income Fund. Â£692m was invested across 12,331 people and the FSA has secured Â£60m in redress for customers. (1)
Royal Bank of Scotland and Natwest found themselves on the receiving end of a Â£2.8m fine for poor complaints handling. The banks' routine handling of complaints was under scrutiny. Of the files checked by the FSA, 53% showed deficient complaint handling and 62% showed a failure to comply with the FSA's requirements on timeliness and disclosure of Ombudsman referral rights. Amazingly, nearly 31% failed to demonstrate fair outcomes for customers. (2)
Most people just get an overdraft for January, but to start the year with this sort of wallop is not good reading.
This news comes alongside the bigger news that Barclays is to exit the financial advice market for its retail customers and to close Barclays Financial Planning. Barclays will continue to offer advice to its higher net worth customers through Barclays Wealth, although it's unclear what higher net worth actually means. (3)
In many ways this has come as no shock to me as I have always believed the process of giving bespoke advice to customers is not as profitable as it is made out to be. I am not having a go at banks here; rather I am having a go at the commercial realities of the ability of banks to give sustained quality advice.
If you, as an investor, want to invest your hard earned cash you want to know that it is being managed well. To understand your needs takes a two hour conversation about risk and reward, (how much are you prepared to see your money fluctuate in pursuit of your gain). This follows a two hour conversation about your future investment objectives and basic investment lifestyle planning in terms of what you want, and an assessment of your overall financial position.
After that comes a four hour portfolio plan to design your investments and a couple of hours of paperwork. This is from a specialist investment advisory firm with all the investment research at hand. We still haven’t yet met you again as an investor to discuss the advice we have prepared above but we have already undertaken ten hours worth of work, a resource not available to the banking sector because of their structure.
It is clear that banks will no longer be able to offer this sort of advice, but Barclays is of the view that the future is in customers buying online with no advice. I am unsure if this is thought through properly. It is also the case that where a customer buys directly online with no advice, Barclays or any other provider is not liable for that 'no advice'. This is often called 'execution only' and involves a firm offering a product online with no advice. The customer believes they are getting the product cheap, but with no liability for the advice, the provider (bank / financial adviser) is delivering a product with the highest margin.
With Barclays confirming that this advice model is no longer viable, how long will it be before the other banks follow suit?
The financial services industry is about to undergo a colossal change with commission being banned and advisers having to meet higher standards of qualifications. In my view this will halve the amount of advisers giving advice and turn the industry on its head. It's been a long time coming but the consumer and the quality financial adviser will be the beneficiaries.
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The value of shares and investments can go down as well as up
1. FT Adviser
2. IFA Online
3. Money Marketing
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'