Can you trust a financial adviser?

The internet is breaking down the monopoly on information held by those working in financial services: consumers are becoming more informed and less reliant on financial professionals. Is this a good thing?

In the world of securities trading there is some rather gruesome terminology. Some purchases are made on a ‘fill or kill’ basis: a broker is given an instruction to buy at the price requested in a certain time or the purchase does not happen. Another such term is ‘execution only’, used to indicate that a client took no advice and asked for a specific product or service exactly.

In some areas of finance, this is very likely. The majority of securities trades are now completed without advice from a brokerage. Trades can be made online or by telephone and a client can ask to buy or sell however many shares in XYZ Company. The trade will be carried out and the individual is presumed to have conducted as much research and analysis as he or she feels necessary. These trades are attractive because the costs are low and there are no ongoing management fees.

Whether the client is competent to research, analyse and compare corporate performance is never asked either by the client, broker or regulator. It is presumed that the decision is to be made by the individual as a responsible adult and that he or she will always act in his or her own best interest.

But the concept of ‘execution only’ applies to more purchases than simply shares. Life assurance, health insurance, loans, pensions and other investments can all be bought in this way. In fact, if a client buys any financial product online, it is almost certain that no advice has been provided.

This stance of no advice suits the financial services companies well. If no advice is offered, it is hard to have made an inappropriate sale. The customer bought - there was no sales pitch. This limits the potential for a regulator to step in and punish a firm, something that has happened frequently as a consequence of misselling scandals. Instead, all responsibility falls onto the shoulders of the client. Without being mean, it is very possible that most clients have no understanding of this.

In the expatriate market in particular, personal financial circumstances are usually far more complicated than an untrained individual can manage. In fact, many trained advisers would struggle in such an environment. Expatriate clients probably need good advice.

But there are other forces working in the opposite direction. As financial products become ever more transparent and fee disclosures need to be made, investors are demanding smaller rather than greater fees and commissions. Unfortunately, as in many other areas of life, you get what you pay for: lower fees result in reduced advice levels.

It does not take a genius to recognise that reduced levels of advice about complex tax or financial issues will result in clients purchasing products and solutions that do not meet their needs. These could be very costly mistakes. Imagine the consequences of purchasing a pension that proves to be incompatible with personal circumstances. Retirement may need to be delayed or future living standards reduced significantly.

Some people will argue, with some justification, that this is no different to what happens when advice is given and received. So many mistakes have been made in the past, deliberately or accidentally, that the result is the same, but with lower fees. In the main though, these cynics would be wrong. The requirements for study and professionalism in personal finance have never been higher.

There is another vital point. If an adviser or company wrongly recommends products in a way that is clearly incompetent or deceitful, the client can complain and press for financial redress. In the current environment, this may be provided. But if no advice has been taken, customers have only themselves to blame and must pay the full price for their own actions.

• Stuart Langridge is an independent financial adviser.

The internet is breaking down the monopoly on information held by those working in financial services: consumers are becoming more informed and less reliant on financial professionals. Is this a good thing?