Davy is just the latest financial scandal – brokers take note

Personal finance columnist Jill Kerby looks at the fallout from the Davy Stockbrokers bond scandal...

The fallout from the Davy Stockbrokers bond scandal continues and Bank of Ireland have expressed interest in buying the group, which includes wealth management via Davy Select division.

As this case shows, the wheels of justice can turn exceedingly slowly when it comes to financial mismanagement and misgovernance, as anyone who has made a complaint against a large institution knows.

Time and again, banks, stockbrokers and insurance companies also regularly missell personal finance products to clients and get away with it: my first experience of this – 30 years ago – was the widespread misselling of expensive endowment mortgages, a market that eventually collapsed when their poor value due to high fees, commissions to banks and financial brokers, and the complete lack of transparency, was revealed.

Next, was the ongoing scandal about life assurance policies, widely used to try to fund education costs for children and mistakenly for life ‘insurance’ policies. The industry pretty much won that round.

Then there was the widespread misselling and downright forgery of customer signatures on payment protection insurance being pushed by lenders of credit card balances and personal loans: billions were repaid in the UK, tens of millions here. And who can forget the economic catastrophe of mortgage misselling in the property boom to 2008 and the more recent tracker mortgage scandal?

At the core of those scandals was the payment of commission and fees, and stockbrokers are part of the pantheon of such earners, whether from government, corporate or client transactions.

They also trade on their own account – which has always struck me as the most blatant conflict of interest – and as the 2014 event shows, even put themselves on the other side of such transactions, unbeknownst to their client.

The prime function of every bank stockbroking firm, every fund management company, is to make money from the account and transaction fees and commissions they charge customers. If they have any sense of fair play and good business practice, they are upfront about those costs, can justify them and hope that the client makes a profit too.

Anyone who does business with a stockbroker knows that payment for the buying and selling of shares is via a commission. Ongoing ‘wealth management’ account fees are also common, especially if the stockbroker had discretionary authority over the portfolio.

But ‘wealth management’ has changed over the years and many people now buy shares directly via lower cost online platforms and even prefer to put together their own ‘self-directed’ pensions that way, though pension regulations require input from intermediaries like trustees.

After the economic crash, facilitating the desire for self-directed investing resulted in Davy setting up an extensive online platform for the purpose. They also arranged for ‘financial intermediaries’ as they call them – commission remunerated brokers, in reality – who, post-crash, were struggling to keep, let alone drum up new, business. They too were enticed to the new online investment ‘marketplace’.

Today, a few hundred broker firms – many who describe themselves as ‘independent advisers’ – are linked to the Davy Select service. Some also claim to be fee-based. It is understood that Davy pay a 0.5% initial upfront commission based on the value of the client fund that is brought to the platform (often from existing life and pension providers) plus an annual ‘trail’ commission of 0.5%.

According to fee-based, certified chartered financial planner, Marc Westlake of Global Wealth Management: “Davy have used their own money to buy in business with the expectation that they would recover that initial outlay from future transactions.” For every €100,000 this would amount to €500; a €1m pension or ARF would result in a front ended payment by Davy to the intermediary of €5,000 and the same again every year as trail commission. [Full disclosure, Marc Westlake is my financial planner.]

People need to be clear, says Westlake, that brokers who take commissions – whether from the conventional pension providers or the likes of Davy – “are still sales intermediaries, not advisers”.

The events of the last fortnight should remind everyone that trust has to be at the heart of every investment transaction, at every level.

The Central Bank may want to reconsider its stance on commissions given how the Davy scandal has further contributed to distrust in financial institutions.

If Bank of Ireland ends up taking over the Davy Group – again – it should too.

Letters to jill@jillkerby.ie.

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