Does It Matter How Your Advisor Is Paid?

Central Bank of Ireland

March 2020 finally marked the deadline for financial advisors in Ireland to comply with an addendum to the Consumer Protection Code, which was itself born out of the Consultation Paper No.116 a ‘consultation on how intermediaries can be paid’ from the Central Bank of Ireland.

At Everlake, our fees have always been clearly disclosed to prospective clients as transparency is a core principle of our business.

The Central Bank of Ireland regulates the sale of regulated financial products via intermediaries to consumers. Whilst the sale of these products must meet the suitability and appropriateness standards set out in the Consumer Protection Code and elsewhere, the lexicon of the Central Bank of Ireland describes the financial advice process as a sales process, and financial advisors are described as salespeople. The assumption being that the ‘Know Your Client’ process is intended specifically to identify a client’s need for a specific regulated financial product.

Whereas we believe that the process of financial planning offers value to consumers independently of any decision to purchase a regulated product. Indeed, many aspects of financial planning, for example budgeting and taxation advice, are not directly related to the purchase of a regulated product and are not directly regulated by the Central Bank of Ireland. Our focus as an organisation is the profession of financial planning and the benefits that this brings to clients in terms of better outcomes as a result of a better client engagement process.

Clearly Defined Terms

It’s questionable whether the regulations mentioned above have helped consumers to make informed decisions about their finances, and that additional disclosure will not result in more informed consumers. We believe that the Central Bank of Ireland should clearly define certain terms in order to distinguish in the minds of consumers when they are being sold a product by a tied-agent, when they are receiving a ‘broker service’ from an intermediary and when they are receiving objective advice from a professional financial planner. To explain each term,

• Tied Agents – can only sell the products of a single product provider they are tied to. We believe that the Central Bank should mandate the use of the term ‘salesperson’ and prohibit the use of the term ‘advisor’ in these circumstances.

• Financial Brokers – can sell the products of more than one provider. We believe that the term ‘financial broker’ is well understood by consumers and represents the ability to select from more than one product provider.

• Financial Planners – we believe that the term financial planner should only be permitted where an advisor has obtained a higher level of recognised professional qualification than the current minimum competency standard.

We sympathise with the Central Bank seeking to strike a balance between the interests of consumers and the representations from a Financial Services industry which is seeking to maintain the status quo. However, we believe that the focus on the intermediary sector is misplaced.

Product Providers

At present the market for financial products in Ireland is dominated by a small number of product providers. These providers have for many years sought to distance themselves from the distributors (intermediaries) and have sought to take little or no responsibility for the suitability of the advice provided. They have simultaneously facilitated a complex web of payment options and provided much of the ongoing professional development to intermediaries. Finally, despite moves for ever greater price transparency in UCITs products, the Life Assurance Companies have, until recently, been able to hide their true costs behind a contract fee.

Rather than point the finger at the intermediary for accepting inducements, when little alternative has been made available to them, it is our belief that the product providers should be more accountable for suitability when marketing their products via intermediaries. The current regulatory framework seeks to manage suitability by ensuring that the retail products sold via intermediaries are appropriate for the needs of consumers.

Where we believe that this process breaks down is that the product producers take little or no responsibility for the suitability process. This responsibility lies wholly with the intermediaries, yet the range of knowledge, experience and qualifications amongst advisors is extremely varied.

Product providers make numerous commission options available and rely on the intermediaries to make full disclosure of payments. However, we believe that the standard of compliance with the Consumer Protection Code is varied across the market, and we do not believe that ever greater disclosure is the answer. It is simply not credible that all advisors in Ireland today are able to provide advice on every protection, retirement and investment product to the same standard. It is essential that financial advisors have the necessary experience and technical knowledge to provide suitable advice to their clients.

Adequate Advisor Knowledge

The incentive of commissions is widely believed to be the main reason for biased and inappropriate financial advice. However, another factor to consider is that many advisors do not have the appropriate technical knowledge or experience to provide the best advice in a wide range of circumstances.

In the UK, the regulator has noted that – “Approximately one-third of firms sampled did not have adequate training and competence procedures in place.” 1

In an industry as important as the provision of financial advice, most rational people would expect to find stringent qualification standards. The reality, regrettably, is otherwise. The hurdles to becoming a qualified financial advisor are astonishingly low. The relevant examination, the Qualified Financial Advisor (QFA) designation can be attained after relatively little study and absolutely no practical experience.

Having passed this examination, there is often little inclination for advisors to attain further qualifications or professional development. The consequence is an industry whose levels of knowledge and professionalism can be woefully inadequate. Financial services companies often do not commit the time or resources to provide further training or development for their advisors. Their priority is often short-term revenue. These businesses are likely to be focused on selling products to pay short-term costs, rather than the longer-term development of their advisors.

Furthermore, CPD events sponsored by Life Assurance Companies are typically nothing more than a product selling forum with little time devoted to raising standards of professionalism.

Sir Callum McCarthy, Chairman of the Financial Services Authority in UK, stated at the Gleneagles Savings & Pensions Industry Leaders’ summit, September 2006 – “There are substantial failings in the recruitment, training and assessment of advisors. We need to see an advisory process which supports treating customers fairly. Too often it does not.”

We believe that a higher level of minimum benchmark qualification than the QFA should be required of advisors, and we propose that the Certified Financial Planner designation should be recognised formally by the Central Bank of Ireland as the current industry gold standard.

1 (FSA Document ‘Treating Customers Fairly – towards fair outcomes for consumers.’ July 2006).