Some timely advice on advisers

The number of complaints to the Financial Services Ombudsman for alleged bad financial advice has soared, writes Caroline Madden

AS THE value of stock market and property-based investments plummet, allegations of missold financial products are becoming increasingly common. So far this year, the number of complaints received by Financial Services Ombudsman Joe Meade relating to alleged misselling of - or bad advice on - investment products, has soared by 250 per cent.

Most of these complaints are still in the early stages of investigation, but in the latest batch of cases settled by Meade, insurance companies have been ordered to pay more than €600,000 in compensation and refunds to aggrieved customers.

In one case, a company was ordered to repay a €250,000 investment in a geared property fund to a retired teacher, as the product was found to be unsuitable for her.

What can consumers do to avoid becoming the next salutary tale and to ensure that the financial advice they receive is in their best interests? The answer is simple, although most people won't want to hear it: for the best chance of getting reliable, unbiased, independent financial advice, you must be willing to pay a fee. But, some would argue, why pay for something that I can get for free?

A common misconception among consumers is that financial advice can be accessed free of charge. This isn't surprising given that brokers and banks constantly advertise "free" financial consultations. However, regardless of what type of financial adviser you use, you will always end up paying. The costs may not be obvious, but you will pay the adviser indirectly through product charges that pay for their commission.

Consumers tend to balk at the idea of paying an upfront fee, but this charging structure offers far greater transparency than the commission-based system, as it separates the price of the advice from the price of the product being bought.

It also means that the adviser's income is not dependent on flogging a product to the client and it guarantees that the adviser isn't being swayed in the slightest by commission levels, which can vary from product to product.

"The only way to be happy that your adviser is truly independent is if they are fee-based and they disclose the commission that they receive,"says Gervase MacCourt of MacCourt Financial Planning.

Most fee-based advisers charge an hourly rate of €200 - €450 for their services. It is important to check that any commissions received on products sold to you will be credited against your fee, so that you don't end up paying on the double.

Some fee-based financial advisers such as Joe McGuinness charge an upfront flat fee. He believes this makes more sense for clients than commission-based advice.

"Commissions are generally percentage-based, so the client who is investing the larger amount is subsidising the smaller clients in most broker businesses," he says, "whereas I would argue that the same work has to be done by the adviser whether the client invests €100,000 or €20,000 - maybe not in every case, but in theory anyway."

McGuinness considers the intermediary industry in general to be very "product-sales driven", whereas he offers a financial planning service to his clients, which may or may not involve buying a product. The aim is to help clients achieve their financial goals with the resources available to them, rather than trying to "fit them with a product", he says.

In addition to choosing an adviser who is willing to work on a fee basis, it is also advisable to opt for an "authorised adviser" as they will be able to provide the widest choice of products and the broadest advice.

The two other categories of financial advisers operating in Ireland are restricted in the range of products they can offer.

"Tied agents", as the name suggests, are linked to one institution and can only sell its products. "Multi-agency intermediaries" (a category that covers most brokers) can sell products from a number of different providers, but not all.

Clearly, the more companies with which they have links, the wider the range of products on which they can advise. However, only authorised advisers can carry out a full survey of the market.

So if fee-based authorised advisers are the best source of impartial, independent financial advice, where can you find them? Unfortunately, the psychological dislike evident among Irish consumers when it comes to handing over fees in return for financial advice means that such advisers are fairly rare.

A list of authorised advisers can be obtained by calling the Irish Financial Services Regulatory Authority at 1890 200 469, but the list isn't particularly helpful as it does not contain any pricing information. Consumers must contact advisers individually to find out whether they operate on a fee or commission basis.

The best strategy is to go by word of mouth. However, even if you hire the services of one who comes highly recommended, do not put blind faith in them. You must still take some responsibility for your financial actions.

In an ideal world, you should do a little background research on any products that they recommend to make sure that their advice stacks up. However, one of the reasons many people seek professional advice in the first place is that they are too time-pressed to do their own research, so this might not be an option.

At the very least, make sure that the adviser takes an interest in your general financial background and your long-term goals, rather than solely focusing on selling you a particular product.

"The important thing is that you get a sense that you are being asked the right questions," says McGuinness.

Advisers who are authorised by the financial regulator are obliged to complete a detailed "fact find" - identifying a customer's financial position, attitude to risk and any other matter that might affect the choice of a particular investment to assess the suitability of a particular product for their client.

They are also required to issue a "reasons-why letter" that should explain why they consider the product to be suitable for the customer. Make sure that your adviser has not only clarified why a certain investment product is attractive, but why it is attractive for you.

If you feel that you adviser has not acted in your best interest or has missold you a product, you should raise your complaint with them first. If you are not satisfied with their response, you should take the matter to the ombudsman. Bear in mind that the ombudsman will only deal with complaints relating to products bought within the last six years.

The complaint process itself is free, but if you hire a solicitor or accountant, you must cover those costs yourself. The ombudsman has the power to order financial services providers to buy back product sold to customers or to pay out to insurance claims. It can also award compensation of up to €250,000.

However, just because an individual is nursing a loss on an investment, that does not mean that they are entitled to compensation. As the ombudsman noted in one of the case studies released last week: "An investment product maturing at a loss does not of itself indicate that advice given to proceed with an investment in that product was bad advice."

If the risk level and the time horizon of the investment product were appropriate for the consumer, and if they were made fully aware of what they were signing up for, then much as they would like to, they cannot pin the blame for its underperformance on their financial adviser.