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Banks can be trusted to give good advice …..  can’t they??

 

You would think so, wouldn’t you, although the financial consumer website, The Motley Fool doesn’t agree.

 

An article by Cliff D'Arcy makes the following points:

 

In the old days, banks would steer you towards their best products and help you to hold on to as much of your money as possible. Nowadays, their primary goal is to make as much profit as possible for their shareholders.

 

Bank managers are motivated by demanding sales targets

Banks want you to overspend

"Annual reviews" are really sales pitches

Banks want you to have high-priced debts

They don't care about your future

They love to sell you over-priced insurance

 

(you can read the full article here)

http://www.fool.co.uk/news/foolseyeview/2005/fev050210c.htm ( you may need to register to read this article).

 

 

 

Coupled with that, banks, being commercial organisations with many employees, see a large turnover of staff, driven by a) the fact that employees want to develop their careers and so move on and/or b) get dispirited at meeting sales targets or fail to meet them and so move on.

 

Now  I can’t prove this with figures, but I have been in this profession for quite a number of years and have heard the stories from my clients about how they never seem to see the same adviser twice.

 

There’s something else as well.  To qualify to give financial advice, advisers must pass a basic level of exam. OK, that’s good, but there is no need to go any further.  I have not met many bank advisers with higher level qualifications, and the ones I have met with higher qualifications tend to be managers who no longer advise and did the exams as a career move.

 

There is absolutely nothing wrong with that,....except that it doesn’t help the client.  And the higher qualification they do is just one step away from the basic exams. Few  bank advisers go further than this unless they leave the banking industry and set up for themselves as independent financial advisers or planners. And I have met a few of these, people who realised that the banks did not serve the real needs of clients, but they wanted to.

 

This lack of commitment to personal development (usually by both the bank and the employee) translates to poorer advice for clients and when this is coupled with the fact that these poor chaps have to meet sales targets, the outlook for the client is not good.

 

 

 

I am indebted to my colleague Dennis Hall of Yellowtail Financial Panning for the following tale.

 

 

A client (a lady of over 80 years) recently sold a house and deposited rather a lot of money in her Barclays account. On her next visit to her branch she was approached by their financial adviser and she expressed concern about inheritance tax. He then explained how  she could make a £200,000 gift into an insurance bond, thus reducing her estate by £200,000 whilst allowing her to retain the income. This sounded too good to be true, she was interested.

 

Following the meeting she received a large pack through the post with details of such a bond from AXA, the insurance company. Not understanding a thing the brochure was saying she finally called me (Dennis) for my opinion. I was scratching my head wondering how to immediately pass £200,000 out of the estate, give her access to the income, and be tax efficient from an inheritance tax position. Unable to come up with the answer I asked to see the documents.

 

OK, let’s cut to the chase here, it doesn’t work as described. The bond is a “Discounted Gift Scheme” and at her age if she were to make this £200,000 there would be a “discount” of slightly more than £72,000. In inheritance tax terms the saving would be nearly £30,000.

 

Leaving aside whether this would work or not I was struck by three things, the complexity of the charging structure, and the amount of commission that Barclays were going to take, and the effect of charges over the life of the investment.

 

Let’s deal with the commission first. Twelve Grand! So you walk into a branch, have a quick chat, perhaps followed by another quick chat, sign the paperwork and they sting you for £12,000! Is this simply daylight robbery? Compared to our charges it is.

 

Next, the charging structure. There are seven, yes seven different charging structures for this bond, none of which I could fully understand. It seemed to me however that our client would be faced with an “establishment charge of 0.625% of the original investment amount for each quarter over the first five years which amounts to a whopping 12.5% or one eighth of your investment wiped out in establishment charges, not to mention the ongoing annual management charges.

 

This doesn’t seem to be good inheritance tax planning to me, you’re either paying the government or you’re paying AXA and Barclays. With a bit of planning and some fee based advice we can achieve a better result at a fraction of the cost – result, less tax to pay and more money in the hands of the beneficiaries.

 

Dennis then went on to look in detail at the charging options and he writes...

 

I cannot get over the sheer number and complexity of the charges available under the AXA Estate Planning Bond that I wrote about recently. How can anything that is meant to be so simple end up as complicated as it is?

 

This is a financial product that has charging options A through to H (seven in all because option E is not available). The option offered to our client by her bank, Barclays, looked like this:-

 

Invest £200,000 and AXA will notionally inflate the investment value to £207,000 (how?), well this sounds good, clearly money for nothing. However, there is an establishment charge of 0.625% of the original investment each quarter over 5 years. Put like this it doesn’t sound much does it, and after all they’ve given an extra £7,000 to invest.

 

But hang on a minute, 0.625% each quarter, that’s 2.5% per year, or put another way £5,000 based on the original £200,000 investment. And then they take this for five years, which amounts to an establishment charge of, wait for it…£25,000. By now that £7,000 extra investment doesn’t sound quite so generous does it?

 

So, just to set up this bond AXA want to take a net £18,000 from which they’ll pay (in this particular case) Barclays £12,000. Nice work if you can get it. Add onto this the fund annual management charge of 0.5% per annum, that’s a further £1035 each year on the original £207,000 and then another quarterly administration charge of £17.50.

 

So having worked my way through this little lot, there’s only another six different combinations of charges to wade through. This is one product we’ll be staying well away from.

 

Thank you Dennis.

 

Unfortunately, this is not an isolated tale and good advisers and planners have a host of such anecdotes.  One of my clients had a portfolio of investments with the stockbroking arm of a large bank. He was not happy with its performance.  I looked at it and found that this bank had a large part of the portfolio in the banks own unit trusts (not very independent), but not only that, they were not even the best performing ones the bank had to offer.

 

Looking at the history of the various transaction in the portfolio, which showed the stockbrokers buying and selling unit trusts, I could not see a defined strategy.  However every change in the portfolio earned a commission for the stockbroker, so irrespective of the performance of the portfolio, the stockbroker was happy as he was earning money.  Now  call me cynical, but who really came first in that relationship.  It certainly did not appear to be the client.