Towry Law accused of losing independence

This is the claim that has been levelled at Towry Law by our source, an adviser who was offered employment by the group recently. The allegations are startling because Towry Law has set itself up as the champion of a more transparent and consumer-friendly form of financial advice, in which advisers are paid a fee. This is in contrast to commission-based sales, which have been the standard for decades and have tempted advisers to recommend products that pay them the highest income.

The contract of employment with Towry Law offered to our source, which was seen by Times Money, includes bonuses for attracting money into Towry Law’s Independent Investment Management (IIM) service. The contract also includes a target of how much money the adviser is expected to bring into IIM over the next year, with the promise of a bonus of 2 per cent of salary for each 10 per cent margin by which he beats that target.

An even bigger cash incentive is payable “if 50 per cent or more of the over-performance comes within [the] first six months”.

Our source, who was an adviser at Edward Jones before it was bought by Towry Law in October, says: “Advisers are being steered towards recommending the IIM service and Towry Law’s portfolios by the promise of a bonus. The temptation for former Edward Jones advisers [who have been asked to sign new contracts with Towry Law] will be to churn their existing clients to meet the target. I would argue that that means they are not truly independent.”

Towry Law’s approach, called discretionary investment management, is offered by many of the most high-profile financial advisory groups, including Hargreaves Lansdown, Whitechurch Securities and Bestinvest. But even where sales targets aren’t an issue, some critics argue that such an approach allows advisory groups and private banks to cream off more of their customers’ money.

Although the fees charged tend to be comparable to those levied on the sale of conventional funds, advisory groups have more control over what they charge and how much of that fee ends up in their own pockets. This can create a conflict of interest between the advisory group’s desire to boost profitability and the obligation to give customers the best advice.

In recent guidance on the issue, the FSA said its main concern was that the desire to make administrative cost savings or to increase assets under management could lead to in-house schemes being recommended when they are not in the client’s best interests. “An independent adviser must conduct a full and unbiased review of the entire market, to demonstrate that this fund is suitable and in the best interest of their client,” says the FSA.

The warning did not refer directly to the type of discretionary management operated by Towry Law. However, an FSA spokesman says: “Where a firm gives a customer advice, they are subject to the same rules on the suitability of advice. Similarly, the same conflicts of interest rules apply.”

There is also the question of choice. When you sign up to a discretionary portfolio service you hand over all day-to-day management of your investments. Clients who think that they are receiving “whole of market” advice may be disappointed to discover that their money is usually invested in a preselected portfolio.

For example, most IIM clients are invested in one of five portfolios via a Dublin unit trust, ranging from “Defensive Strategy” to “Growth Focus Strategy”. Although Towry Law says the funds for each portfolio are chosen from the whole of the market, this falls short of the bespoke service that many investors expect from a financial adviser or wealth manager.

Performance data is also difficult to obtain, making it hard to compare the portfolios offered and alternative investment schemes. Towry Law says that as it is not “selling or promoting funds” it does not make the performance of its investments freely available. However, it revealed that its best-performing strategy last year was represented by its Growth Focus portfolio, which returned 16.7 per cent compared with a 22 per cent return from the FTSE 100.

Andrew Fisher, the chief executive of Towry Law, denies that there is anything wrong with the practice, arguing that the discretionary management approach offers benefits to clients. It can, for example, make it easier to rebalance a client’s portfolio without incurring capital gains tax. “The structure offers huge diversification, risk management and portfolio construction advantages over a typical private client share portfolio,” Mr Fisher says. “The client is under no obligation to buy our independent investment management service.”

The appropriate portfolio is recommended only after an adviser (called a “client manager” at Towry Law) agrees an investment objective and risk profile with the client. Even so, that does not explain why Towry Law feels that its advisers need incentives to sell the IIM service.

Asked why, Mr Fisher said: “I don’t believe that an individual adviser can monitor and choose a manager out of the 5,000 on offer. [The bonus] provides an incentive to encourage people to understand the best way to manage money.”

FSA to crack down on commissions

Faith in financial advisers has been shaken to the core by a series of mis-selling scandals. However, the Financial Services Authority (FSA) hopes to make such outrages a thing of the past.

From December 2012 the regulator will insist on a clearer distinction between independent advisers, who are unbiased and can recommend products from across the market, and sales advisers, who offer products from a limited range of companies or only one.

The FSA also intends to prohibit product providers, such as unit trusts, from deciding what commission they pay advisers for recommending their products — with those keen to attract business paying the highest amounts. Instead, customers will agree upfront how much they will pay an adviser, without any influence from product providers.

Commission will not be totally outlawed, but if an adviser does offer a product that carries a commission, this will have to be made clear to the client.

The aim is to move away from the current system, where 80 per cent of advisers’ payments are derived from commissions, towards a fee-based approach.