What good (and bad) looks like

What good (and bad) looks like

Image by Gerd Altmann from Pixabay

I’ve spent my career trying to hang around people who know more than me about my chosen profession on the basis that I’m likely to learn much more that way.  This approach has served me well over the years as I have met some of the leading practitioners both in the UK and internationally.  A common trait that they possess is a desire to find ways to improve their clients’ lives and to serve them more effectively and to share best practice so that more advisers can do this and more clients can benefit.

Consequently all the financial planners and advisers that I know are well-qualified (holding the internationally-recognised Certified Financial Planner licence) and ethical professionals who act in such a way that the clients’ interests come first, even if their regulator requires only a lower standard of behaviour.

Occasionally however, I come across an instance of adviser behaviour which serves to remind me that even now, after decades of regulation and numerous initiatives to improve it, there is still work to be done.  Such examples serve to remind us of why we have the regulation that we do, even when it can seem burdensome and excessively costly to those who would do the right thing anyway.  The following example serves to illustrate this.  Names and some details have been changed to preserve anonymity.

Claire is a friend of a friend who lost her husband some years ago and is now in her late eighties.  She keeps fairly active but is experiencing memory problems and although she was ill in 2023, she is now largely recovered.  She inherited a respectable occupational pension and some assets from her late husband and around 15 years ago engaged an adviser with whom she still deals.  This adviser, who works for a large company whose embarrassment I will spare, set up various investments for her in the form of several insurance-linked products.  I can’t be certain why these particular products were used in preference to unit trusts, open-ended investment companies or investment trusts (most of which generate annual dividends which can be either distributed or reinvested and all of which permit the use of capital gains tax exemptions each year, making them more efficient for most investors).

However, I remember that when the Retail Distribution Review came into effect at the start of 2013, banning the payment of commission for most investment products, there was a sharp increase in the sales of these insurance-linked vehicles in 2012, followed by a conspicuous drop in the following year after implementation.  Until 2013, for many years the insurance-linked products had also paid considerably higher commissions (typically around double) those of the alternatives.  At the time, personal finance trade publications (whose journalists presumably had a better idea of such things than I) linked this increase and then decrease to the abolition of commissions at the end of 2012.  Given that their tax treatment (their principal technical difference compared to similar investment products) did not change, this explanation seems like a reasonable one.

When she originally met her adviser, she told him that she was a cautious investor and indeed she still regards herself in such terms, which is consistent with what we know of the persistency of risk tolerance in adults.  Once we reach our early twenties, it generally changes remarkably little for the rest of our lives, although there is commonly a gradual decline in later life.

Given that, one might reasonably expect that the portfolio (a six-figure value) would have a weighting to risky assets like equities of somewhere under 50%.  Maybe even as low as 10-20%, which is around the optimal low-risk portfolio mix.  Unfortunately such an expectation would be far from the reality.  Although the service that she receives from her adviser is limited to an annual meeting at which he hands over a portfolio report and says everything is fine, that report reveals that the actual weighting towards equity-type assets is around 95%.  There will doubtless be some clients for whom this is entirely suitable but none that I have ever encountered is in their eighties and describes themselves as a cautious investor.

Given the apparent discrepancy, I was unsurprised to learn that she has never been asked about her objectives, expenditure or other assets or asked to take any form of test to assess her risk tolerance objectively.  This is one of the first things that a financial planner would do.  They do it not because it is a regulatory requirement but because it is recognised globally as just good practice.  After all, how can it be possible to assess the suitability of an investment without identifying how much risk an investor is willing and able to take, as well as how much risk they would need to take to achieve their goals?

To complicate the scenario further, Claire’s two children are both badgering her for money for themselves.  Indeed, they even hired a solicitor to draft a lasting power of attorney for her, which they then pestered her to sign until she did.  We are fans of lasting powers of attorney and recommend them to all our clients but one vital aspect is that the lawyer who advises on it should be hired by the person whose affairs it covers (the donor), not those who will be the attorneys.  This makes it clear that the lawyer is acting for the donor and avoids the inevitable conflict of interest that arises if the attorneys (who in this case are also the likely estate beneficiaries, who are also short of money) are issuing the instructions.  If the attorneys want their own legal advice, they can engage their own lawyer to explain their duties and obligations.

However, one fortunate side effect of several decades networking with other financial planners is that I know plenty of them.  One in particular is well qualified, has considerable experience of working with vulnerable clients and is also relatively close to where Claire lives.  After having the situation explained to her, she agreed to meet with Claire to see what she can do to help.  Having known her for years, I have complete confidence that she will do an excellent job and explain clearly the implications of the situation in which Claire finds herself as well as what steps she can take to find a solution that meets her needs rather than those of the assorted third parties whose focus seems to be on meeting their own goals.

It is sad that several decades of regulatory initiatives have still not prevented some practices but at least with the number of Certified Financial Planner professionals increasing, instances of poor advice should become less frequent, even if there is still some way to go.

This blog is intended for information purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.  Your capital is at risk when investing.  Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance.