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Advisers bend rules to rip off investors

Unscrupulous financial advisers are tricking investors out of thousands of pounds by flouting rules that were meant to ban hidden charges and herald a new era of trust and transparency.

Advisers bend rules to rip off investors

Eighteen months since the ban on commission payments for financial advice, Times Money has uncovered evidence that some advisers are finding other ways to receive payments that could lead to biased advice. We have passed on the allegations to the Financial Conduct Authority (FCA) which has promised to study them.

The commission ban, the key part of the Retail Distribution Review (RDR), was introduced to dispel the belief that financial advice was free. This arose because advisers were paid by financial groups, not investors, when they recommended a product.

Before RDR, for example, most investment funds had an initial charge of 5 per cent of the sum invested, of which 3 per cent was paid to the adviser. So if you invested £10,000 and paid the full charge, £300 would go to the adviser, which raised concerns about bias. The fear was that advisers recommended the products that paid them the most.

Since January last year, the regulator has required most advisers to be clearer by charging a fee for investment advice rather than hiding costs in a product’s charges. The rules are, however, being sabotaged in a number of ways.

The introducers

Some advisers who have been disbarred from practising — or are not qualified under the new rules — are getting round the regulations by teaming up with qualified advisers.

Craig Palfrey, of Penguin, a chartered financial planner, says the unqualified individuals act as though they are still bona fide advisers, but it is their qualified colleagues who sign all the paperwork. A spokesman for the FCA says it was keen to crack down on “introducers” posing as advisers.


One way advisers get around the commission ban is by registering their company in a jurisdiction such as Gibraltar while carrying out business in the UK. Mr Palfrey says that advisers engaged in “passporting” continue to take commission on investments, often choosing products such as offshore investment bonds, which make upfront payments of 7 per cent. These payments are banned in the UK but permitted in some overseas jurisdictions.

Service charge con

Many advisers now levy a “service charge” for the
work they do and frequently agree with the customer that this can be taken out of the customer’s investments, rather than paid as a separate fee. Malcom Kerr, a senior adviser at EY Financial Services, says: “This can be perfectly fine, but there is a concern that the majority of advisers are operating new fee arrangements that turn out to be broadly identical to the old-style commission payments, with a 3 per ecnt initial charge and a 0.5 per cent annual charge.”

Improper inducements

The FCA fears that, while “hard” commission in the form of cash payments has ended, “soft” commissions continue to be a problem. These include hospitality and payments by financial groups to advisers for IT developmentand conferences.In a review last year, the regulator found that some life-insurance firms had arrangements that could influence advisers.

Old-style charges

St James’s Place, the wealth manager, continues to operate what some critics would see as an “old-style” charging structure. It has not moved to embrace “clean” share classes which, within a fund, are those that have had commission for financial advisers or fund supermarkets stripped out. Justin Modray, of Candid Financial Advice, says: “One of the reasons St James’s Place feels able to do this is that it offers its own range of funds, but with management outsourced to third parties — in effect, it can charge whatever it likes.”

He points to the SJP UK High Income fund, which is outsourced to Neil Woodford. Mr Modray says: “It has a high initial charge of 5 per cent and a 1.86 per cent annual charge. This appears rather steep when compared with Woodford’s own new equity income fund, which has no initial charge and an annual charge of just 0.75 per cent plus platform charge of about 0.25 per cent.”

A St James’s Place spokesman says: “We do offer our clients an illustration which breaks down the annual charge into the amount payable to the St James’s Place adviser [0.5 per cent], the sum charged by St James’s Place for administration and its own margin [1 per cent] and the amount paid to the fund manager (Woodford) for running the fund [0.36 per cent].

“We do not offer funds with ‘unbundled’ charges because we insist that clients take advice and pay for it.”

Karen Barrett, of, the UK’s biggest search site for financial advisers, says: “The people referred to here are very much in a minority. The vast majority of advisers regard the RDR as an opportunity to raise their standards even higher.”

Times Money wants to hear about any examples of financial companies attempting to get round the provisions of the RDR. If you can help, contact