It is said that a little knowledge is a dangerous thing. I was looking forward to an objective report on Panorama that considered whether trust in our Banks was misplaced. I admittedly felt that I knew the answer to this and many of the reasons. Unfortunately it was my own faith in the quality of Panorama’s investigative journalism that was misplaced.

This was not a good example of investigative journalism, but simply more of the rather sensationalist red-top journalism that leaves nobody satisfied and nothing resolved. This was a grumble. My key points are as follows:

Every business that has to sell something to generate revenue is prone to ethical dilemma. This includes charities, Banks, the BBC, you and me. Think about it. This is the nature of being a human in a capitalist culture. The story is as old as time and the first traders passing off knackered old sheep as good breeders.

The Banking business model has not adapted well to the changes within financial services over the last thirty years. A Bank does far more than lend money from your deposits these days. Arguably they shouldn’t, but there it is. We expect free banking yet fail to appreciate that this is cross subsidized from other bank products – overdrafts, poor deposit rates and a plethora of financial products.

In the real world, the majority of people have an ostrich-like approach to money (be it personal or national). You may be surprised to learn that a significant number don’t know how much they earn, a far greater number have little idea about how much they spend. I believe that this unwillingness to do basic accounting is our way of being unwilling to “value” ourselves, as though it has any real connection to what we are “worth”. The cold truth is that we are in collective denial about money and don’t really want to know the numbers, because we know that by doing so we are forced to face some very uncomfortable truths that will require us to change.

So like children, we trust our parents – or institutions that seem to represent them – the Banks. Yet, much like our parents, they fail us, because guess what, they don’t know everything and are essentially human. I’m not apportioning blame, merely stating a reality. I am a parent too.

What do you really think “free advice” is worth?… not worth paying for I suspect? Certainly the complaints and scandals would suggest that this is the case, commission based “advice” has got us into all sorts of pickles over the years. That is not to say that paying for advice solves the problems of greed and incompetence, but I believe that the setting for such would be much smaller-scale. It seems that the regulators (FSA) would presumably agree with my sentiment as from 1st January 2013 all advisers will have to charge fees, unless you sell insurance (… no..I don’t understand why either). All advisers will also have to have an agreed level of qualifications, so that they are “competent” at least in theory. I would suggest that the reason Barclays is no longer offering financial advice en masse to its customers is not for fear of complaints and fines (by their standards both are small beer) but is has rather more to do with the fact that research by Ernst & Young reveals that advisers in Banks really cost £250 per hour…and not many of its customer base want to pay, particularly as until now it has been “free”.

If I were in Government reflecting on how well the country was saving for their future so that reliance upon the State purse was reduced or removed, I would be very concerned about this. I would want to know why in 2011 Mr & Mrs Adams and thousands like them still have such a poor understanding about the different types of financial adviser and how a Bank may not be terribly impartial. I would want to know what has been done to promote good advice, ideally independent and what had been done to improve financial literacy and  numeracy. Wouldn’t you?

To really do a good job for a client requires time spent getting to know and understand them – something that Panorama struggled to really reveal. Time is money and as I have just said, from 2013 everyone pays. Good advice requires context, something that sensationalist journalism appears to forget.

Panorama briefly explain the sorry tale of Mr & Mrs Adams both retired from their post room jobs with presumably small sums of money. As a married couple, they sought financial advice separately, from different banks and didn’t understand what they were doing. Panorama are right to reveal their respective advisers poor ability to communicate this, but fundamentally they have little or no financial education. They describe that they wanted to live off the interest, yet ended up with an investment, something completely different, a poor show from the Banks concerned. Deposit accounts pay interest not investments. I’m guessing that both of them ended up with a stock market investment (something that presumably they had never done before), probably in a single fund (eggs and basket). I can only guess that the timing of their investment meant that a 50% fall was largely the result of the credit crunch and not understanding investments, decided to sell theirs when things were at their worst (buy at bottom, sell at the top). Today most of this loss would have been recovered as the markets have improved, which is one of the many reasons why investing is for the long-term, not 12 months. So the Banks get it in the neck, and yes Barclays and others messed up. In Barclay’s case (the one mentioned in the programme) they were fined for mis-labelling a fund which was much more aggressive than they had understood. Part of the structural problem of large institutions is that if you are up high enough you cannot distinguish between a red Ferrari and a truck full of tomatoes. I regret to say that Panorama has the same problem, failing to look under the bonnet of what on earth is going on.

It is concerning that despite successful complaints (the clients admitting that they didn’t understand what they were doing, the Ombudsman agreeing because the Bank also failed to communicate understanding). Both banks have met the claims and put Mr & Mrs Adams back where they started plus interest. So in a sense, the system worked, although Panorama believe that the couple still lost money. Come again..Panorama then go on to state that Mr & Mrs Adams are still several thousand pounds out-of-pocket because of the costs incurred using a company to help them with their complaint. Say what? a beautiful unintended side step. Nothing about these “claim companies” – just a sense that the Banks had still left their clients hanging. The Ombudsman can and does allow costs associated with a claim to be included in the settlement, which suggests that these companies have a very separate commercial arrangement with the likes of Mr & Mrs Adams, who of course are vulnerable, being taken in once….why not again. This is really the story worth investigating. We know that many of the Banks provide poor service and poor advice – often because of time (or lack of). We know that there is no such thing as free advice, we know that good financial planning should be within the context of your resources, goals, needs and agreed sensible assumptions about the future… don’t we? What we don’t know is how these companies find the likes of Mr and Mrs Adams, persuade them that they can help any better than say Martin Lewis or Which? And charge “many thousands” for the opportunity to help people who clearly don’t have “many thousands”. We also do not really know why the regulator takes so long to punish the Banks and seems to act mercilessly with the small IFA. Is this perhaps a double standard?


Investment Risk

A major focus of the programme seemed to have revolved around inability to understand investment risk. This is a hot topic for the FSA. Most advisers use a form of risk questionnaire, but the FSA often don’t like many of them, as they are often too narrow and too prescriptive, with both the adviser and client often not really understanding their purpose. In essence this should be a tool to open a conversation about the subject and revisited.

Enter the hapless HSBC adviser who “looks into the eyes of the client (undercover reporter) and knows” that they are low risk – something that Panorama had briefed its reporters to request. OK this is daft, but at least he is attempting to pick up body language and other “soft information” to which we are not privy. When pressed to complete a risk questionnaire, he does so, but the result is that the reporters risk score is rather higher than expected – it is this that then shapes the investment advice (the software) not the requirement of the client or the hunch from the adviser. In practice, both adviser experience and client requirement are ignored in preference for the software result. This would also warrant investigation by a good journalist. I use risk profiling software, the world’s best (FinaMetrica) it is an extensive psychometric bit of kit used by leading advisers. However it is really part of a conversation, not a finite answer. It needs thinking about and reflection. The FSA recently issued a paper outlining their concerns about risk questionnaires – which is well intended, but given that they didn’t really identify what they want to see and that using one is surely better than nothing, was disappointing in its communication.  However, Panorama and the Banks seem to concur that unquestioning obedience to software output is… a better job? the FSA wouldn’t agree.

Oh and by the way, can an investment fund be worth nothing? Well yes technically it can, assuming that all of the shares, cash, gilts and property within the fund are worth nothing… which if that is ever the case, you won’t be worrying about your investment, you will almost certainly be worrying about surviving some sort of apocalyptic event.

As for incentives to sell riskier investment funds, this is a non-issue for bank advisers. They get paid the same whether the client buys a high risk fund or a low risk one, the amount they get paid depends on the product (not the fund) and the amount invested. This is not to be confused with investment managers or stockbrokers, who get paid bonuses based upon the returns they achieve – so taking risk to boost returns is in their interests, potentially gambling with your money for their bonus.

It is not clear how much opportunity the two IFAs (called independent financial experts by Panorama) had to state some of the issues that I have raised. Preferring to think the best of them, I can only assume that this was either not understood or simply edited out due to time constraints, which is of course precisely the same problem that the Banks have.

The bizarre twist at the end of the programme is of a lady who decided to manage her own investments. Her £175,000 needed to produce £10,000 a year. She kept a third in cash (£58,327) and so had £116,673 to invest . She is happy to report that her investments are performing well and “cannot see the money running out”. Well, let’s think about this shall we….£10,000 a year is 5.71% of the portfolio. So provided that it is achieving this each year (plus inflation) everything is ok. Unfortunately cash is not producing 5.71% at the moment so her investments have to work rather harder. She will have trading costs and also have to pay tax on both the income from the portfolio and capital gains tax if she makes any gains. Hopefully she is using her ISA allowances and various other tax reducing options. This is not a sensible strategy for most people to adopt. If full-time, qualified fund managers find it difficult to consistently beat the market doesn’t that tell you something? They are not nitwits.

Managing your own portfolio is for people who are good at managing risk, find it easy to sleep, are not anxious about the markets or the news and have a clear investment strategy. They do not invest emotionally. That excludes the majority of the population. You do not get a feel for the market if you spend a few hours a week on it. You might (in the short-term) make more money if you do it yourself, you can also lose more money if you do it yourself – for which there is ample evidence. Look, I know that many investments have performed badly, but the delusion that trading yourself is cost-free is staggeringly stupid. Fortunately Penny Haslam does point out that managing your own portfolio is a step too far for most of us, but why on earth put this confusing piece into the film.

I sincerely hope that Panorama improves its game. There are valid stories to be told and concerns to raise, but this needs to go hand in hand with educating the public. As it is exam season, I’m afraid that this piece from Panorama would not pass. I’m sure that you (Panorama) can do better.

The half-hour film is available on the BBC i-player for a limited time. It is found here.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email