Beware free financial advice

So, you’ve been invited in to your bank for a financial check-up. And it’s free! Great – but how impartial can it really be?

WE DON’T WANT to be mean (that’s a lie) but we can’t help raising a deeply sceptical eyebrow at the notion that Ireland’s banks are ramping up their financial advice to customers.

If you’re with Bank of Ireland, for example, you may have recently received a letter inviting you to contact your local branch to talk to someone “who’s qualified to give you expert advice”, while Irish Life is now offering chats with qualified advisers over the phone.

But should you really be taking counsel from an institution that you, as a tax payer, has had to bail-out to the tune of billions of euro? And regardless of the banks’ current difficulties, taking advice from someone who is typically trying to meet their sales targets is never a good idea – even if the service is free.

So what do you need to look out for and should you always pay for financial advice?

For many of us, seeking out financial advice is like going to the dentist. You know your finances need care and attention but there is always something better to do. However, as the current crisis has shown, you really need to keep on top of your affairs. After all, you get your car checked out every two years under the National Car Test, so why not your finances?

Perhaps it’s time for a general financial “NCT”, or maybe you are on the brink of a major life decision, such as planning for retirement, separating from your spouse or learning how to protect you and your family if your circumstances should change.

If that’s the case, it may be tempting to accept your local financial institution’s offer of a financial review, but before you accept that appointment, take some time to consider your needs and whether or not the bank will meet them.

There are three types of financial adviser operating in Ireland: a tied agent, a multi-agency intermediary and an authorised adviser.

Generally, financial institutions fall into the first category, in that the products they can offer are “tied” to certain providers, including themselves.

AIB, for example, sells investment and insurance products from Aviva, while Bank of Ireland’s insurance products are underwritten by RSA Insurance.

So, if you’re looking to buy a life assurance or home insurance policy, the bank’s financial adviser will only be able to offer you very limited options – which may not be as attractive as other products on the market.

While the offer of a free review might be tempting, you may end up paying for it over the life of whatever products you end up buying. If you’re tempted to think that a slightly less attractive financial product isn’t such a big deal in the long-term, think again. Remember, a fund which charges two per cent a year in management charges will set you back about €15,000 in fees and earnings foregone over the life of a 10-year €50,000 investment.

Compare this with just €4,000 in fees if the fund only charged 0.5 per cent.

It’s also worth remembering that while financial institutions may not have a rosy record when it comes to managing their own finances, they have not done much better with their customers’ either. Half of the Financial Ombudsman’s investment complaints last year were to do with mis-selling and misrepresentation on the part of financial institutions.

As an alternative, you could seek out a multi-agency intermediary, which can sell and advise on products from a number of firms; or an authorised adviser, which can provide products from all providers in the market. The advantage of going down this route is that your adviser should be able to discuss a much wider range of financial products. However, they may not be as independent as you might like.

Financial advisers make money in two ways: from the fee they charge you for advice; and from commission they earn on selling products.

So, if you are not charged for the time you spend with an adviser, you can take it that they are likely making a commission on any financial products you sign up for. The problems with a commission-based structure are many.

If, for example, you are looking for a pension, the adviser may recommend a particular provider because they pay the biggest commission – not because it is the best product for you. And if you are carrying a lot of debt, the best advice might be to use any savings you have to pay down this burden, but an adviser relying on commission will need to sell you a product to make any money. So he or she may instead recommend you sign up for an investment product with any outstanding savings you may have.

Unfortunately, the Central Bank does not track how much financial institutions pay advisers to sell their products, so it is difficult to assess how influenced they are by commissions they might receive.

Indeed, while the UK is set to ban commission-based financial advice associated with the sale of products such as annuities and mutual funds from next year, there are no such plans to do the same here.

So, if you’re prepared to pay for advice – and clearly good advice can end up paying for itself – where can you find such an adviser and how much should you expect to pay?

It’s a question that is regularly asked on the personal finance pages of newspapers and online forums, but unfortunately, there is no satisfactory, fully-comprehensive source.

While the Central Bank provides a register of authorised advisers (see registers.financialregulator.ie), which is the first step you should take in your research, there is no demarcation in how these advisers are paid, although the regulator does give a breakdown of what products are sold by each adviser.

The best option is to compile a list of authorised advisers in your area, and then make some screening calls to select the best fit for you.

Essential questions to ask include how the adviser gets paid; whether or not they are entitled to commission on any of the products they sell; and the number of financial services firms they deal with – in general, the more the better.

You could also ask your potential adviser whether or not they offer advice on An Post savings products.

Given that An Post doesn’t pay commission on its products, it could be a way of weeding out those who rely on such payments. And if the adviser does take commission on a product they are selling, and offers to reduce your fee on this basis, make sure you think clearly about whether or not this is influencing your investment decision. As the aforementioned example shows, picking the wrong product for your needs can be an expensive decision.

How much can you expect to pay for the service?

Financial adviser John Lowe offers a 20-minute consultation by phone, or in person, for €65, while Myadviser.ie charges a once-off fixed fee of €1,000 for a financial health check, which can be tax deductible if used to set up a pension plan.

Cregan Kelly in Swords, Co Dublin, offers a free initial consultation, followed by a fee ranging between €200-€500 for a financial review, or up to €1,500 for a company pension review. These fees may be reduced if the company earns commission arising out of the review.

The Wealth Shop in Santry, north Dublin, offers a financial review for €499, which includes an assessment of mortgages, debts, pensions, savings and investments, and insurance cover.

Checklist

Before you take on a financial adviser, make sure to ask some simple questions:

How much do your services cost?

Do you accept commission? If so, on what products do you receive it?

How many financial service providers do you deal with?

Do you advise on products offered by An Post?