x Abu Dhabi, UAETuesday 25 July 2017

Be sure to think twice before taking financial advice

This is the perfect time for some introspection on financial advisers. Based on recent experience, some home truths about advisers need to be driven home.

Best practice in wealth management requires that advisers follow a few basic steps, including taking a view on the expected performance of stocks and, bonds. Reuters
Best practice in wealth management requires that advisers follow a few basic steps, including taking a view on the expected performance of stocks and, bonds. Reuters

In the glory years leading up to the 2008 meltdown, shiploads of people made a lot of money. No one bothered about who was selling what to whom and why. And when the music suddenly stopped many were left holding duds, not to talk of massive leverage.

So this is the perfect time for some introspection on financial advisers. If you are wealthy, you will find private bankers or so-called independent financial advisers (IFAs) knocking on your door with "exciting" investment ideas and promising to multiply your money. However, based on recent experience, some home truths about advisers need to be driven home.

For one, they may not be as independent as you think. In the UK, the Financial Services Authority (FSA) has classified advisers into three types - tied, multi-tied and independent/fee only. Tied means the adviser has a tie-up with a global product provider as a distributor. Multi-tied means they distribute products from a range of companies. Both are paid a commission from the provider on what they sell to the investor, so their natural inclination is to sell high-margin products.

In the UK, you can seek impartial advice by talking to an IFA who must offer advice on all financial products on the market (which carry commission) and, in addition, must offer clients the choice of paying a fee for advice on products, rather than being paid by commission from the financial institutions that promote these products. Whenever the adviser is paid a commission, one should be wary as that means he also wears the hat of a salesman. His advice could be biased and not necessarily in the best interests of the client.

Qualifications are important. In the UK, the entry level is normally the certificate in financial planning, the next level is the diploma in financial planning, then comes the advanced diploma in financial planning. The highest level is certified financial planner issued by the Institute of Financial Planning. This is an indication to the client of an adviser's expertise, although it is not a substitute for experience. All IFAs also need to keep up with current developments in the profession. Most certifications also require the holder to abide by a code of conduct. It may be a good idea to quiz the adviser on this aspect. I would be wary if he never graduated and/or his experience comprised flogging used cars or property.

Best practice in wealth management requires that advisers follow a few basic steps - planning (which includes assessing risk profile, finding out how much return the client needs, taking a view on the expected performance of stocks, bonds etc and designing a portfolio that meets the first two), execution, rebalancing and performance evaluation. Planning is critical and drives everything else. If a client has the ability to take high risks but is not willing to do so, the adviser should honour this. In reality, advisers often push the high-risk and long duration products because the commission is normally higher. Again, an adviser's qualifications and experience help a lot.

Another big issue is the "K" factor. Does the adviser know what he is selling? Most of them in this region push products but have negligible knowledge of what they are selling. This happens since most of the products distributed in the GCC are designed and manufactured in the US or Europe, and the local entities simply distribute these. Moral of the story - get hold of someone who knows what the product actually is, instead of the less useful marketing fluff.

The sales guys are so keen to sell products but vanish once you sign off on the acres of fine print and hand over the cheque. Many back-office functions in the region are still not fully automated or integrated and are below par. Which means that if you want to get a valuation report, exit the fund or switch between funds it may be a long process. So ask about after-sales service.

And what if things go pear-shaped? In the UK, all IFAs are regulated by the FSA. If a client buys a product based on the advice of an IFA that turns out to be unsuitable, they can complain and may even receive compensation.

Regulation is critical and needs to be beefed up in this region.

There is clearly a lot that needs to be done in this part of the world on wealth management by all parties - investors, regulators and advisers. For a start, perhaps the last mentioned should stop calling themselves IFAs when they are anything but.

Binod Shankar is a chartered accountant and a CFA charterholder