Reform at last

A decade ago I wrote here about the way financial advisers are paid. I told you how, instead of giving you a bill, your adviser is allowed to sell you investment products in exchange for a commission from the product provider plus a cut of your assets every year for as long as you continue to hold those products. So if you buy an investment fund from an independent financial adviser (IFA), he will receive a payment up front and then another payment every year, whether you ever have the good fortune to come across him again or not. All these payments will come out of your money — you just won’t know much about it.

Think of it, I said at the time, as like buying a house through a search agent, but instead of just paying him a fee for finding the house, you also pay him another fee equivalent to the costs of his family holiday in Cornwall for every year you live in the house thereafter. But it gets worse. Now imagine that the agent who helped you buy your house didn’t actually guide you to the best house for your purposes. He knew of several others that were both cheaper and better, but he didn’t show them to you for the simple reason that his fees would have been lower.

That’s exactly what has been happening in the financial industry for years: all products pay advisers different levels of commission, and advisers tend to push you into the ones that pay the higher commissions to them. They will tell you this just doesn’t happen — that there is absolutely no ‘commission bias’ at all in their business. But that’s nonsense. Those in any doubt need only look back at the sorry parade of financial products that UK investors have ended up holding over the years or note that investment trusts — which have a long history of outperforming other types of funds, but which come with no commission — make only rare appearances in most portfolios put together by old-style IFAs.