The Cambridge English Dictionary defines an industry as ‘the companies and activities involved in the process of producing goods for sale…’.
Insurance companies produce investment and protection products and investment houses create funds. It therefore must be a basic instinct for these manufactures to sell their products. They do this either via their own sales force, or via independent financial advisers (IFAs). They have become so good at this that they have financial advisers and the public brainwashed into thinking that financial planning is all about selling products.
Images of happy people, new cars and holidays are used to tempt us into buying a multitude of products investing in an abundance of funds, that we probably don’t want or even need. This sell sell sell attitude has already led to many mis-selling scandals. (Pensions, endowments, PPI).
It is important to realise that the financial services industry does not want you to spend your money. They would also prefer you not to repay your loans early.
The more money you spend, the less they make, so they come up with all kinds of excuses to invest your money.
They try to make you feel that you need to be invested in the latest fund that will make massive returns. There are currently over 2000 unit trusts on sale in the UK, ranging from basic managed funds to specialist technology funds. How many funds do we need?! All so that they can take their annual management charge.
If you want to repay your mortgage early, they charge early repayment penalties, sometimes around 6 months interest. This usually stops the borrower from reducing their debt, (not realising that, after a year, they’ve saved 6 months interest after the penalty!).
Endowment mortgages were great for the financial services industry; not only did they make loads of money in annual management charges from the endowment, but, because you never paid anything off your mortgage until the end of the term, the lender earned more in interest. Loads of money!
But we all know what happened with endowment mortgages….
When George Osborne delivered the 2014 Budget that included the freedom for pension investors to draw down on their pension funds, instead of buying an annuity (a lovely little earner for the insurance companies) I could almost hear the pin stripes and red braces; ‘Ohhh no, they can spend their own money!’.
There were stories circulating that people would blow their pension funds on Lamborghinis and then have to scrounge off the State when they ran out of money. I always thought if people were sensible enough to accumulate a pension fund large enough to buy a Lamborghini, the last thing they would buy with their fund was a Lamborghini!
Soon after the announcement there was a flurry of new funds launched to support these new freedoms. Many of these were designed to provide a high income. These would be great for the industry; get the punter to become reliant on a regular income, so they then cannot spend their capital. More fees!
According to Sir Steve Webb, an ex-pensions minister, in an article he wrote in the Telegraph on 7 June 2019, the evidence is that people with meaningful pension pots have not blown the lot and most people, with larger funds, take financial advice, and in most cases they are withdrawing their money at an entirely sustainable rate.
Would you believe it? The public aren’t as daft as the industry thought! But can the same be said of all advisers?
Traditionally much of the training for financial advisers has been provided by the product providers, which could be an explanation for some of the poor advice given over the last 30 years.
A couple of years ago, needing to top up my CPD (continuous professional development) hours, I attended a free seminar where 4 – 5 product providers were presenting. Outside the main room, there were various ‘exhibitors’ (the product providers). Piles of glossy product brochures were available, along with free pens, writing pads and sweets. All to take away in branded plastic bags (no 5p charge), much to the satisfaction of most of those in the audience who walked out with armful of what can only be described as propaganda.
I have never been to a similar seminar since.
I would suggest that for the public to have confidence in financial planning and advice, the link between the investment industry and the actual advice needs to be broken. Proper financial planners should not accept free seminars, handouts, and promotional gifts.
Advisers should seek to find relevant impartial training and pay for it themselves.
I believe that lifestyle financial planning should come before any discussions about product or funds. The conversation should be about what you want to do with your life with the resources that you have available. The answer to this fundamental question may lead to the recommendation of a product, if appropriate. This product should just be a tool to help achieve your financial planning objective; it should not be a tool to line the financial services industry’s pockets.
All clients should be able to trust that their adviser will provide them with reliable advice to help them achieve their desired lifestyle without the fear of running out of money, whatever happens. They shouldn’t need to worry about being sold products or funds that they don’t really need.
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