The Evidence-Based Investor

The morality of suing financial advisers

Posted by Robin Powell on February 24, 2018

Financial advisers are the most important link in the asset management value chain. The most effective thing you can do to increase your chances of achieving your financial goals is to find yourself a good one.

Does that mean that all financial advisers give good advice? No, of course it doesn’t. And does it mean that advisers who give good advice today have always given good advice in the past? Again, it doesn’t.

Managing someone’s finances for them is a huge privilege. It’s also a massive responsibility. The potential for an adviser to make a positive difference in a client’s life is considerable, but so too are the consequences of bad advice.

Until 2012, UK advisers were paid commissions to recommend investment products. Often, the more expensive the product was, the higher the commission advisers were paid. It doesn’t take a genius to work out that such a system, which is still the norm in most countries, is open to abuse.

Advisers may, in all other respects, have acted totally professionally. They may have given their clients peace of mind; they may also have saved their clients from self-destructive behaviour during periods of extreme market volatility. But there’s no escaping the fact that millions (yes, millions) of Britons were persuaded to buy products that they would have been better off avoiding — investment bonds and whole-of-life policies, for example, which paid large commissions but were usually expensive and almost invariably delivered meagre returns.

Millions, too, have been given bad advice on pensions. In 2001, the Labour Government commissioned the Sandler Review, which led to the introduction of simple, low-cost pensions, called stakeholder pensions. Despite that, many advisers continued to recommend more expensive products — and earned commissions from product providers for doing so.

Also, over the years, many advisers encouraged their clients to transfer out of so-called final salary pension schemes and into personal pensions or SIPPs. Some of those advisers subsequently recommended moving from one personal pension to another, again earning commission in the process.

I don’t want to rake over old ground here. But, as regular TEBI readers know, the vast majority of investors would be better off investing, for the very long term, in a broadly diversified portfolio of low-cost index funds. I’m not aware of a single adviser with at least a 20-year track record who can actually prove that their clients have consistently beaten the market on a cost- and risk-adjusted basis.

Typically, investing in actively managed funds, over an investing lifetime, will cost investors a third or more of their potential returns. That’s a huge deal. It means the difference between retiring with a pension pot of £400,000, as opposed to £600,000 — or £4 million as opposed to £6 million.

It’s not as if we’ve only just learned that the cost of actively managed funds far outweighs any perceived advantages. Academics have been telling us as much for more than 50 years.

Were advisers conflicted? Of course they were. Did that conflict of interest make advisers more inclined to recommend expensive products? Certainly, in many cases, yes, although recent research from North America that advisers’ preference for active management is more likely the result of ignorance and incompetence.

For me, the reason why clients were badly advised is immaterial. The fact is that they were and the damage has been done.

The next question is, do clients who’ve been left out of pocket by bad advice deserve to be compensated? I cannot think of a reason why you could possibly argue that they shouldn’t. After all, most of us wouldn’t think twice about asking for a refund if the train we bought a ticket for didn’t turn up, or got us to our destination two hours later than scheduled. It’s only fair, if the hotel that looked great in the brochure turns out to be laden with cockroaches or next to a noisy building site, that we should ask for compensation.

If it’s reasonable to seek redress when hundreds or thousands of pounds is at stake, why should’t people who’ve lost tens or hundreds of thousands of pounds as a result of bad advice do the same?

The reason I’m saying all this is that my content marketing company, Ember Regis Group, has recently started to work with a firm of solicitors that helps UK investors to claim compensation for poor advice. I myself appear in two of the videos.

It wasn’t a decision I took lightly. I’m very careful about who we work with. We don’t, for instance, work with traditional claims management companies. But several advisers have made it known that we shouldn’t be helping to promote this type of business at all. 

I hear those advisers. I sympathise with them. I genuinely appreciate their feedback. As a journalist, I understand the natural inclination to want to protect the profession you passionately care about and that you’ve given your career to. I respect their opinion, but I don’t share it.

I don’t expect, or want, to see wholesale legal action against small financial advice firms. Many, or in fact most, of them have recommended actively managed funds in the past, and generally in good faith and with the best intentions. But I would like the banks, insurers and big financial advice chains that systematically sold and churned the most expensive products with little or no regard for clients’ best interests, to be brought to book.

In the meantime, the entire advice profession needs to do some serious soul-searching. True, in the industrial-scale scam that is active money management, there are much guiltier parties — not least the product providers themselves. But, whether deliberately or not, advisers have played an important part in a mammoth deception which has left hundreds of millions of investors around the world with significantly lower returns than they should have received.

Denying that fact, and denying the right of investors to seek the redress they deserve, will only prolong distrust in the advice profession even more.

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Robin Powell

Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector. Regis Media.

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