I was sat having a coffee with a friend trying to explain the tangled web that is the cost of financial advice and how people end up being charged for it without realising.
The trouble is that to fully understand the problem and the level of deceit you need to understand how the hustle works. So to emphasise the ridiculousness and greed of the financial services industry I used the coffee shop we were sat in as an example. Below I've summarised the conversation.
Imagine if you wanted to buy a cup of coffee. You'd go to a coffee shop. In this story the coffee is a metaphor for an investment fund. So when you go into the coffee shop there is a menu as long as your arm and you are a bit bewildered.
However, just outside the coffee shop is a man with a stall (he is the equivalent of a financial adviser). He can not only tell you which coffee of all those on the menu you'll like he'll even go and get it for you. You like the sound of that and he tells you it will cost you £1.50. So you hand over your money and receive a cup of coffee. What he didn't tell you was that you could have walked in the shop and bought the coffee yourself for £1. But by asking him he charged you an extra 50p. So when he buys the coffee he keeps 50p while the coffee shop keeps £1.
Everyday on the way to work he says hello and suggests a cup of coffee you might like. In fact, most of the time he gives you the same type of coffee as the one you had yesterday. He's very friendly and you like the service. Everyday you pay him £1.50 for the coffee.
That is how financial advice worked before 2013, the price of advice was bundled (hidden) in the cost of the investment. However, the rules changed and the adviser had to explicitly charge you for his service rather than it being bundled into the cost of your investment.
So in the coffee story that meant that from 2013 the man with the stall had to tell all his new customers that if he helped them he would charge them £1 for the coffee and 50p for his advice. Understandably this put a lot of people off. In fact only the wealthy used him as they didn't want to queue. However, as you were an existing client he didn't have to disclose to you that he was charging you an extra 50p. So he was allowed to charge you £1.50 still.
In fact, even if you decided to go straight into the coffee shop without talking to the man at the stall he had an arrangement with the coffee shop that you would be charged £1.50 and he'd still get 50p every time you ordered coffee.
This is exactly what financial advisers have been doing for the last few years. Despite the rules banning commissions they could still take money from existing customers even if they didn't provide any ongoing service.
The chances are that many of you have been paying more for your investments than you needed to. The good news is that from April this year advisers can no longer just take the old commission. However there is a catch. While he/she might not get paid anymore you are still charged the same but the fund house keeps it.
So in the coffee shop example, you'd still be being charged £1.50 a coffee but the man with the stall outside won't get 50p. Instead the coffee shop keeps the whole £1.50! So you are still paying over the odds for your coffee (investment) because you once took advice. It is estimated that 250,000 people are unknowingly in this position
The good news is that you can now stop this overcharging and in this week's podcast (you can listen to below) I tell you:
- how to check whether you are being overcharged
- how to stop it
You can also subscribe to the show via iTunes
Photo by amenic181. via freedigitalphotos.net