Do financial adviser business models compromise advice?

The nature of the company a financial adviser works for could have a big impact on the quality of advice and service they give. Find out what you should look out for..

Companies providing financial advice tend to fall into two camps. The first employs advisers, usually on a basic salary with bonuses dependent on hitting sales targets. The second provides support and marketing for self-employed advisers, taking a cut of the adviser’s earnings in the process.

As I’ll explain below, neither is entirely satisfactory from a customer’s point of view.

A number of the privately owned medium to larger sized companies employing advisers usually have one goal in mind: grow profits as quickly as possible with a view to selling or floating the business in the medium term. Now, nothing wrong with this per se, sounds like a sensible commercial strategy. But customers of such companies could end holding the short straw.

In order to maximise profits (and, hence, the value of the company) the focus will usually be on maximising sales and minimising costs. To do this the company will probably pay its advisers a low basic salary with healthy bonuses linked to hitting steep sales targets. So the advisers will be under pressure to sell as much as possible and maximise revenue from each of their customers. This is unlikely to bode well for you, especially as the adviser’s focus will more likely be on the next few years ahead of selling the business rather than looking after your financial interest’s long term.

Once the business is sold, the adviser may well decide to leave, especially if they were lucky to enough to own shares in the business – so you may find yourself being passed from pillar to post.

The self-employed advisers who use a company (or ‘network’) to look after their compliance, administration and marketing pose another set of potential risks to customers.

These advisers work for themselves and pay a cut of their earnings to the network for the services provided. Given advisers tend to keep the bulk of what they earn by way of commissions or fees, their incentive might also be to earn as much out of each customer as they can, potentially compromising the quality of advice given.

Some networks are also too generous to their advisers, which runs the risk of going bust. From the adviser’s point of view this doesn’t matter too much, provided they’ve been paid what’s owed, as they can simply move to another network, taking their customers with them. Trouble is, on reaching the new network an adviser might be tempted to switch their customers’ investments/policies to earn some new commissions – I’ve seen this happen countless times in the past.

Of course, there are exceptions. I’m sure some advisers working through networks provide excellent advice and service. And not all financial adviser companies are looking to sell-out.

But I would suggest that whenever you take financial advice, always try to work out the adviser’s main motivation. If the bulk of their earnings are linked to hitting targets or earning commissions I’d be very wary. And if you follow your adviser to another company, be very suspicious if they quickly recommend costly changes to your investments and policies.

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