HOW much you are charged for financial and investment advice goes to the heart of assessing value for money. Unlike single transaction purchases like buying bread or a car, financial advice often involves a long term financial product from which the adviser will derive an initial and ongoing income from the investors’ capital. It is vital therefore to ensure that all costs and charges are clearly disclosed and also to understand the charge for initial and ongoing advice.
In the UK the financial regulator has required full disclosure of charges and advisers’ earnings for many years. In Spain and Gibraltar product information is required, but full disclosure is a new concept and while sometimes the disclosure may be explicit, other times it may not.
Why is full disclosure important?
Many people like the concept of commission believing they are not paying for advice, but the reality is that commission (and other charges) only come from the investor’s pocket.
Given the complexities of financial products, even an expert will find it impossible to assess if it represents fair value unless there is full disclosure of charges. One example is commission deals between fund managers and financial advisers that can be totally opaque. Hidden fund based commissions can add significantly to costs and when sold as a fund within an insurance policy can go undisclosed. Ironically this non-disclosure may make, by design, the insurance policy look cheaper than fully disclosed alternatives and result in greater investor uptake. This is exactly why guaranteed charges and income disclosure is so important.
The good news for those who like the ideal of transparency and being treated fairly is that the EU is imposing full disclosure of all charges and will ban back-door payments on investment products. The EU directive requiring this (MIFID II) is in place, but individual member states will need time to implement the higher disclosure requirements. Until then investors should ask when seeking financial advice about the firm’s disclosure policy.
The Fry Group already guarantees UK standards of disclosure in Spain and we look forward to a level playing field for investors making difficult decisions.