Fast little loans
A shocking set of statistics recently released by the Financial Services Board (FSB) shows that about 41 percent of financial advisers are not properly qualified to give you advice.
Before the end of June, 44 060 financial advisers and 4 690 key individuals (34 percent) must write the basic examinations to test their knowledge of the Financial Advisory and Intermediary Services (Fais) Act – the law which prescribes how they should act, particularly in providing you with financial advice and selling you financial products.
If they fail, they have until the end of September to rewrite.
Gerry Anderson, FSB deputy executive in charge of FAIS, says no decision has been made on what will happen to those financial advisers who do not meet these already extended deadlines.
I would suggest that it is time for the chopper to fall, simply because there are just too many bad apples out there who have no morals at all, particularly those who prey on the elderly, selling them high-risk junk such as property syndications.
Personal Finance continues regularly to publish articles on financial advisers who are punished by the financial advice ombud, Noluntu Bam, for failing to meet the requirements of the FAIS Act in providing financial advice.
And where most fall short is doing, as required by FAIS, a proper due diligence examination on any financial product they sell.
It also seems that too many advisers think they are above the law and continue to be driven by one thing – putting you into products that pay maximum commissions, such as property syndications.
And what makes this worse is that this bad behaviour, as I have pointed out before, is too often supported by the industry itself, in the way it goes about structuring the sale of products on perverse incentives, ranging from commission structures through to very questionable additional payments.
And, very often, the questionable payments are hidden and structured so that the legal requirements on disclosure can be side-stepped. Three quick examples are:
* Netco structures. This is a rip-off started by Discovery Life and taken up by others, where separate payments are made to companies linked to financial services providers to provide “administration” services. These services, if they exist at all are, as I understand it, nominal or should be provided by the financial services provider anyway. Interestingly, the payments are linked to a percentage of premiums and not to a cost for each service. The FSB is looking closely at these structures and hopefully will ban them.
* Sign-on incentives. This is another rip-off started by Discovery Life and taken up by others. These incentives are used to poach sales agents from competing companies, and the agents are paid by way of lump sums and share bonus schemes. The incentives often come with sales targets. The argument for the upfront payment is claimed to be compensation for lost future commissions from clients they left on the books of their former employer. This is a bit of a sick joke, as it seems that one of the first things these switching agents do is also switch their clients across to the new company, so they are, in effect, getting double commission.
* Linked-investment service provider companies. Some of these companies are now structuring their offerings so that the commissions/fees to advisers are not paid by themselves but by the underlying unit trust companies at a fixed rate that may be challenged. Not only does this make payments more opaque, but it is very similar to negative response marketing, where you are provided with something (goods or a service) without requesting it and have to turn it down to avoid paying. This practice is illegal. The annual commission/fee is 0.7 percent, which is higher than the generally accepted 0.5 percent.
Now, some unscrupulous advisers don’t even wait to be offered these additional payments by the companies involved in these unacceptable practices; they are out there demanding them from companies that are resisting the trend.
Over the past few weeks I have been told by senior executives of two financial services companies – one a life assurance company and the other a major short-term insurance company – how they are put under pressure by these unscrupulous advisers.
They told me they are regularly approached by financial advisers who demand additional payments over and above the regulated commissions, with the promise to then sell their products.
This is the problem when one company starts a practice that side-steps regulations. It then becomes a bidding war, with consumers being the innocent and unknowing victims.
What perturbs me, however, is that whenever these practices are started, competing companies do the wrong thing. They join the bidding war instead of publicly blowing the whistle on the misbehaving competitor and bringing pressure to bear on the regulator to stop the practices.
It should be obligatory for product providers to report to the FSB any financial adviser who indulges in what is, in effect, blackmail that verges on a protection racket. The FSB, in turn, should immediately suspend the licence of the offending product flogger.
The problem with financial advisers who continue to ignore the legal requirement placed on them to act in your best interests is that they are probably a minority, but the majority who do act in your best interests have their reputations tarnished.
Those who do their best for you must do more to get rid of these self-interested, commission-driven financial advisers, who sell products that damage your long-term financial prospects.