Avoid the advice rip-off!

New research reveals that Mum has been the biggest financial influence on 36% of Brits, but is following your mum the best way to boost your wealth?

Our parents influence us in so many ways and it seems that influence reaches right into our bank accounts.

According to research from Marks & Spencer Money, 36% of Brits say that their mums have had the biggest influence on the way they handle their money. What’s more, 32% say that their dads have had the biggest influence. In other words, 68% of people say that one of their parents has made the biggest impact on their financial lives.

I think those are pretty striking figures given that the majority of mums and dads aren’t financial experts. Of course, some parents handle their money well, but I’m sure there are plenty of others who have made big financial mistakes.

Amateurs

So why do we allow amateurs to have such a big influence on our financial decisions? I think it’s a question of trust. In theory, you might expect financial advisers to have the biggest impact on our financial lives, but they don’t. I suspect that’s because we don’t trust them.

That lack of trust isn’t surprising. Over the last 20 years we’ve seen frequent examples of financial advisers giving bad advice. Look at these three:

Split cap trusts

A split cap trust is a specialised form of investment trust which invests in the stock market. During the 90s many people invested in these trusts in the belief that they were ‘safe’ investments – that’s what they were told by their advisers.

In reality, splits weren’t safe at all. Many of these trusts had borrowed money to invest in the stock market. That debt made the trusts vulnerable when share prices started to fall in 2000/01. Even worse, many splits had invested in other splits which increased their vulnerability still further. Some splits collapsed and investors lost all their money.

Any adviser who said that split caps were safe should hang their head in shame.

Structured products

Like split cap trusts, structured products are complex investment vehicles that have been marketed as low-risk investments.

Yet when Lehman Brothers collapsed, some of these products became worthless. Thankfully many investors in these products have received compensation, but I still believe that advisers shouldn’t have recommended these products in the first place.

With profits funds

In the late 90s, a financial adviser tried to persuade me to invest in a with profits fund. His argument was that I would benefit from stock market growth but I wouldn’t have to worry about share price volatility as the returns from the fund would be ‘smoothed’ by the insurance company which managed the policy.

Trouble is, with profits funds are pretty inflexible investments as you’ll be hit by a Market Value Reduction (MVR) if you want to withdraw your money early. What’s more, charges are high and the performance of most funds has been disappointing. Thankfully, I rejected the advice and didn’t invest.

Commission

On top of all this, there’s the issue of commission. Most financial advisers offer a free service and make their money from commission offered by product providers. Free advice seems attractive at first glance, but the danger is that an adviser will push you towards the product that pays the highest commission rather than the best product for your needs.

So I’m not surprised that many folk are most influenced by their parents. But given that parents may not have much financial knowledge, is there a better option?

Well, there are some good advisers out there - the problem is it’s hard to figure out who is good and who isn’t. One way to increase your chances of getting a good ‘un is to go for an adviser who charges an upfront fee rather than rely on commission. I’m also drawn towards advisers who call themselves ‘financial planners.’ I like this job title because it emphasises the greatest service an adviser can do for you – encouraging you to look at your finances as a whole.

If you focus on your financial ‘big picture’, you’ll be more likely to make the right long-term decisions instead of frequently switching between financial products and racking up high commission charges along the way. (Just to be clear though, I’m not saying that all ‘financial planners’, by definition, offer good advice.)

You can also get help from other people in the same situation as you. If you have a financial query, why not ask a question on our Q&A platform? You may be surprised as to how quickly you’ll get a reply from another lovemoney.com reader. The quality of some responses is very high.

However, I think the best option is to trust yourself. Try to build up your financial knowledge by regularly reading articles on lovemoney.com, and go for simple, straightforward products that you understand.

By all means, go and see an adviser or planner – especially if you haven’t drawn up a financial plan. Just remember to be sceptical at all times and remember that you’ll get more value from an adviser if you’ve done some research beforehand. Then you won’t be bamboozled by jargon and, who knows, you might end up richer than your mum!

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