The FSA has finally realised the Independent Financial Advisors (IFAs) are not independent, and it intends to do something about it.

The main change is that only those who charge clients a fee, rather than being paid a comission of selling products to their customers, will be allowed to call themselves “independent”. Amazing news, commision salesmen are not independent!

In fact, some of the (relatively) better IFAs do provide fee based advice, but the majority take a commission on sales. How anyone ever thought that the latter was compatible with providing impartial advice escapes me.

Of course, stockbrokers are paid a commission as well. However this is only a problem with advisory broking, and the only real temptation is to churn, not to actually make the wrong investments.

A more fundamental problem with both IFAs and stockbrokers is that both are fundamentally salesmen. How much money they make is not determined primarilly by how well the manage investments, but by how many clients they can get. The word sales is used in connection with those people in brokerages doing insitutional business, but tends to be avoided by those selling to private clients.

In general brokers have a better reputation in the industry than IFAs, but I can still produce a few annecdotes as evidence of brokers lack or knowledge or ability.

I was once talking to someone who said that their own broker seemed to be knowledgeable about companies and markets. Why do people always think that their own broker is good? I suggested that it is likely that the broker was not talking from his own knowledge, but simply reading out research. A few days latter, after another conversation with the broker, the client was certain I was right.

However, it probably is preferable that brokers do read out research, rather than relying on what they know themselves. I was once within earshot of a broker who was telling a client about a particular FTSE100 company. He said “and their main business is …”. He actually got it completely wrong. The business he mentioned was probably the company’s strongest UK brand name, but not their biggest business.

Of course, someone who is knowledgeable about investments can probably talk to IFAs and brokers and get a feel for who is most competent. However, if you are knowedgable, why do you need them? Use a discount broker and save yourself some money.