Why the European Union Must Push Fee-Only Financial Advice

In the year 1960, on average, every woman in the European Union gave birth to 2.5 children. Today this number has sunk to 1.5. Over the same period, life expectancy has increased strongly to an average of over 75 years. As a consequence, everybody who is currently in their thirties, forties or fifties has to carefully plan his or her investments to finance old age. They cannot trust the state-run pension system any longer because there will soon be too few young people to maintain the ageing population. Only the early and smart investment of personal savings will enable the young to keep their standard of living 20, 30 or 40 years from today.

Yet, financial advice for people with investable assets of all sizes is still mostly bad, misleading and ridden by conflicts of interest. In consequence, investors in the EU are wasting billions and billions of euros because they invest in poor financial products and pay too much in fees to their banks and financial advisers. This is money which – at some point not too far off – will be badly needed to pay for the daily necessities of life for EU citizens. Instead, banks, financial intermediaries and advisers will have reaped billions in profits from their clients through commission and kick-backs for ill-devised, risky or low-performing but expensive financial products.

One recent example of the failure to protect the consumer is the initiative for better financial advice in Germany lead by the Ministry of Consumer Protection. In the wake of the financial crisis, politicians announced in 2008 and 2009 that much better protection for private investors should become mandatory by law: standardized, easily understandable product descriptions, complete transparency of fees or kick-backs, and clear professional standards for fee-only advisers to make it easy for clients to find an adviser who has no conflicts of interest. Almost none of these political intentions has become law yet. On the contrary, the German business daily Handelsblatt reported recently that the banking lobby has been very effective in derailing the initiative and making it even more difficult for independent fee-only advisers to counsel private clients (find the report here, German only).

Only in the UK and – and to a lesser degree in a handful of Scandinavian countries – does fee-only, independent advice have more than negligible market share. The UK, probably the most advanced financial market in the EU, has outlawed the payment of kickbacks to independent financial advisers by 2012 (advisers who want to receive commissions from product providers have to label themselves “restricted advisers” as opposed to the fee-only “independent advisers”). 

Given the poor track record of national governments to withstand the pressure of the financial industry lobby, only the EU Commission has the political clout to confront banks and financial service distributors in the EU. The Commission has to set clear standards for product labeling, product information and financial advice and push for their complete and fast implementation in national laws. Kickbacks and hidden commissions must be outlawed. Financial advisers must be mandated to address only their clients’ interests and not those of fund sponsors or in-house product pushers. Private investors should directly and transparently pay for advice and should be free to choose the best fee-only advisers. This is the only way to help an entire generation of citizens to save and invest successfully and be able to use the fruits of their investment strategy to pay for their retirement.

(NB: In September MyPrivateBanking will publish a report on the status and outlook for fee-only advice in Germany)