Personal Finance: FSA is a poor `adviser'

The Financial Services Authority aims to guide us on money. John Andrew isn't buying it

How much do you understand about the intricacies of looking after your money? For millions of people, the honest answer would probably have to be: not very much. Part of the problem has been that the financial services industry, whose representatives we deal with regularly, is primarily interested in selling to us, not helping us learn about money.

All that could soon change. For the first time in the UK, a financial watchdog - the Financial Services Authority (FSA) - has been charged with a statutory objective to promote public understanding of the financial system. This includes promoting awareness of the benefits and risks associated with different kinds of investment, and providing appropriate information and advice.

The FSA has recently published five booklets - Financial Advice; Pensions; Boosting your Occupational Pension; The Euro and ISAs. As you'd expect, they are not product specific, but are written generically.

Stripping the subject of personal finance down to basics without using jargon or appearing condescending is an art. The writer must not only have a thorough understanding of the subject, but have a lightness of touch, so that the result is interesting, yet informative.

So how has the FSA fared? In my opinion, not well. The contents cause me concern. The cornerstone of the series is Financial Advice. Having explained that there are many different ways to save and invest, it states: "First of all you need to decide how much you can afford to save and over what timescale. Different types of saving or investment are suitable for different purposes."

This is an odd way forward. The reader should be advised not to consider an investment (which is a medium to long-term commitment) until a "comfort level" of savings has been built-up in an instant access savings account.

The FSA has a different approach: "If you can't afford to lose any of the money you invest, think about going for a lower-risk home for your money where you are sure you will get back at least what you put in." There should be no need to "think": it is essential for those who cannot afford to place their money at risk to stick to savings accounts!

Then there is a real gem. The reader is given seven questions to ask themselves before making any savings or investment decision, one being: "What is my tax position?" The reader is advised that some investments "are particularly suitable for non-taxpayers. Others, like pensions are more suitable for taxpayers.'

The emphasis is wrong. It is not the tax efficiency of pension plans that is the crux of the matter, but a need to make provision for retirement which is important. Moreover, someone who pays no tax, is not in a position to make contributions to a pension fund.

Rightly, the reader is advised to "shop around" for advice. The text continues: "If different advisers offer you different advice, ask them why. They should be able to explain why their recommendation is better than alternatives." Theoretically this appears fine, but, no one can explain why their advice is superior, only why they consider it to be so.

The FSA appears obsessed with commission and charges. It explains that the Key Features document, which a sales person must give you and which gives information on the product that's being sold, provides vital details such as "commission and charges, the level of risk, the aims and benefits of the product." Factually correct, but the emphasis is wrong.

The list should be reversed. The most vital thing for investors are the aims and benefits of the product so that they see whether it meets their needs. Ascertaining whether the risk is acceptable is the next item. Charges come last. If the product is not suitable, the commission paid to the adviser and the charges are totally irrelevant as a purchase should not even be contemplated.

The FSA's guide to ISAs - Individual Savings Accounts - does introduce an important aspect of investment - performance. Having advised the reader to ask the adviser how much they will make out of the deal, the charges and for details of any penalties which are payable, the reader is told to ask: "How does this plan compare to others? Can you show me an independent performance table?"

If the adviser replies "No" to these questions, where can the reader find performance tables? When located, how are they used? The guides are infuriating in that they encourage questions to be asked, but give no guidance as to proceeding to the next stage.

A favourite ploy of tied advisers is to proudly show a performance table when they feature in the top 10. The fact that a fund has performed well over, say, a 12-month period could appear impressive to a new investor. What the FSA does not explain is that one should not look at odd years in isolation, but at a fund's performance over a number of years.

The greater the number of periods examined the better. A consistent presence in the top quarter of all funds in a sector over a period of years, is far better than one achievement followed by years in the doldrums.

John Andrew has written many books on financial topics, including `How to Manage Your Money', aimed at schools and soon to be published by ProShare, an organisation that promotes share ownership

Read the FSA's guides and make up your own mind. Call 0800 9173311 for free copies. Next week the FSA will reply to John Andrew's comments

`The Independent' has published a free 20-page `Guide to Independent Financial Advice', written by Nic Cicutti, the paper's personal finance editor, which tells you the areas in which an IFA can help and how to go about finding one. It comes with a list of names and telephone numbers. Call 0117 9712932 for a copy