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Taking the “if” out of IFAs

16 May 2024

Nick Lyth, May 2024

In my experience, IFAs are among the very best financial practitioners. I have wondered why this is, because it represents something of a transformation during my lifetime. They were among the very worst in my younger days. But I think their qualities now include a determination to put their client first, to seek out his or her individual preferences, to treat him or her as a distinct, unique human being, which seems virtuous and kind. This is combined with another important quality: a professional concern to protect their clients. The default position of the modern IFA is safety, or minimum risk. Allowing for the fact that the issue they are dealing with is always financial, and that they are considering the best options for their clients’ money, this too seems to me to be both virtuous and kind, because it often runs counter to the IFA’s own self-interest. They will often earn more by the promotion of higher risk options.

As I say, this has not always been so. The roots of their profession, if it is a profession, lie in the 1950’s and 1960’s when Insurance Companies in the US and the UK employed salesmen to go from door to door selling insurance on commission direct to the householder.  They were called Insurance Salesmen, and became a byword for hard sell, door-stepping, slippery rogues. This role was immortalised by Prudential in 1949, who meant to sanctify it rather than vilify it, by creating the phrase, “The Man from the Pru”.

In fact, the origins of “The Man from the Pru” go back much further than 1949. These were first employed by Prudential in 1848, more than a century earlier. By the turn of the century, the salesforce numbered 10,000. By the 1960’s, Prudential estimated that more than 6 million homes in Britain were visited by their agents. This is a startling figure. In the 1960’s the total number of households in Britain was nothing like as many as it is now. Estimates vary, but a total of 12 million households in 1960 is not unreasonable. Prudential was visiting more than 50% of the population.

In fact, Prudential should not be pilloried for this, and in many ways, over time “The Man from the Pru” acquired an endearing quality rather than otherwise. Without them, many people would never have started saving or taken out life assurance policies at all, which brought real benefits in the harsh post-war world.

 

Unregulated Sales

The real damage was done by companies like Hambro Life, Hill Samuel and Allied Dunbar, which blended direct marketing (advertisements and direct mail selling products off the page) with direct sales forces selling door to door. This was hard sales of the worst kind.  Motivation and reward were both quite clearly directly contrary to the householder’s interests, quite clearly aligned with the company, which made the sales person on the doorstep equally clearly the agent of the company, not the servant of the client. Without any form of regulation, there was an appalling amount of ruthless and unscrupulous exploitation of the financial ignorance of their victims. The scale of their mis-selling was so great, it was laughable.  

It became a familiar joke in the 60’s and 70’s. In Woody Allen’s Take the Money and Run, released in 1969, there is a scene in which his incompetent life of crime leads the hero to being sentenced to “10 years in solitary with an insurance salesman”, and we see Woody Allen being lowered into a hole in the ground listening to a perpetually selling insurance salesman in a suit and tie, and the hatch being closed on the two of them.

This awful, legendary reputation put insurance salesmen at the bottom of the pile of financial practitioners, when considerations of trust, reliability, honesty, care for their customers, even questions of knowledge, competence, or expertise were taken into account. Their defining characteristic was desperation. They were thought to be desperate for your business, because they could only earn if they sold. So they had to sell.

The consequence of this was, inevitably, mis-selling. This reputation was based on a reality that started to become a scandal in the 1960’s and 70’s. Financial products which were not fit for purpose in the first place were ruthlessly promoted and sold to people, who were not in a position to understand them, by insurance salesmen using fraudulent claims concerning the returns the investor could expect. The innocent victims caught by these salesmen were often elderly pensioners who depended on their life savings, only to see them disappear into the hands of these predators.

 

Regulatory Revolution: From Tied Salesmen to Trusted Advisors

The scandals provoked Government regulation of the industry, out of which the SIB (Securities and Investment Board) was born in 1985, becoming the FSA (Financial Services Authority) in 2001, and the FCA (Financial Conduct Authority) in 2013. It is important to note here that the term, Independent Financial Advisor, was born out of this change. The Insurance Salesmen who acquired such a bad reputation were, in fact, tied to insurance companies and not independent at all.  Their problem was indeed that they could only earn if they sold their company’s products, regardless of the quality or suitability of the product.

The creation of the SIB, and its subsequent iterations, set out to remove these blatant abuses of public trust. The change has been so successful that the role of the Independent Financial Advisor has been transformed in every way from that of the old-fashioned tied Insurance Salesman. The list of qualities that defined the worst of the breed has now become the best. Today, they are second to none in terms of trust, reliability, honesty, care for their customers, even questions of knowledge, competence, or expertise.

This transformation has been accompanied, in a curious see-saw effect, by the collapse in the reputation and respect for a direct relation of theirs in the financial world, the Bank Manager. In the disreputable days of the insurance salesman, the Bank Manager occupied the same ground as the Doctor and Priest. He – it was always a man – was beyond reproach, beyond question, a pillar of the community, a pillar of rectitude. His relationship to your money was sacrosanct. He knew best. “Trust” was a word that was synonymous with “Bank Manager”. Think of Captain Mainwaring in Dad’s Army.

In the intervening time, Banks and all associated with them have become a byword for grasping reckless casino financial strategy, for the worst in customer care, for unreliability, inaccessibility, carelessness, irresponsibility, everything that is untrustworthy in the financial sector. They have been exposed in a way that has become neither surprising nor noteworthy, except in extreme circumstances such as the awful 2008 crash when several of the largest Banks collapsed entirely and had to be saved by the State – us, in other words – or when something farcical happens like the recent nonsense surrounding Nigel Farage, Alison Rose and the NatWest Bank.

As the IFA’s star ascended, the Banking sector’s star has fallen. But I, for one, am glad. I like my IFA. I liked my previous IFAs. I do remember one whom I distrusted after his advice proved to be faulty. But it was a long time ago, I was young and injudicious, and the regulatory framework that now protects me had not been created. Thankfully, it now has.

 

Image provided by Towfiqu barbhuiya on Unsplash