Fact Finds and Risk Assessments are about Ethics and Morals (both for mattress salesmen and financial advisers)

WRITTEN BY ELIZABETH FLYNN: I went to buy a new mattress the other day.  Thought I’d treat myself to a good quality mattress from a reputable retail outlet. The latest developments in bedding technology mean that choosing a new mattress requires much soul searching after an incredibly detailed fact find and risk assessment.

Naively, I assumed this new mattress purchase wouldn’t take more than 20 minutes so I could fit it in between the gym and the weekly shop. All I had to do was bounce on a few mattresses within my price range and hope my boobs didn’t jiggle about too much (or, if they did, that nobody would notice).  Easy.

The sales adviser, Tom, booted up his computer and took me through the finer details of how mattress technology has evolved from simple springs and horse hair to high-tech foam with a better memory than mine. Tom produced a detailed questionnaire – and that was the end of getting home in time for lunch. The questions ranged from my health to my sleep patterns and then some probing stuff about who I was likely to share my bed with – and whether this person had a bad back.

How was my back?  Did my life involve physical strain?  What side did I normally sleep on? Did I have kidney problems?  Did I use a mattress topper?  Did my house have air conditioning?

There were no simple Goldilocks options here: “hard, soft or just right”.

Tom spent nearly an hour getting to know the intimate details of my life and sleeping habit before letting me loose to bounce on the display beds.

In the end the mattress I ended up was an absolute joy – the essence of comfort and my sleep is now amazingly refreshing.  Who would have thought that the quality of my mattress would have such a profound effect on the quality of my life?

All the fact-finding and risk assessing of all factors relating to my horizontal life paid off.  I got the mattress of my dreams. 

It felt great to be treated so well and guided so carefully in finding the option that was just right for me – all for a €500 mattress.

By contrast, imagine you have a pension – representing your entire life savings. You’ve seen the adverts: “Thousands of expats have benefited from their free expat savings review”. You want to keep your pension safe and hope it will increase (and certainly not decrease).  A 2% increase would be nice.  An 8% increase would be fantastic.

Then you find a financial adviser you think you can trust.  He offers you a cool “guaranteed” 8% growth.  And you think: “what could possibly go wrong?”

This happens all the time in the unethical sector of the offshore financial services community.  Advisers jump straight into a promise of tempting end results. Such advisers seldom discuss whether this 8% growth would entail too much risk for you. 

The salesman (adviser) offers the buyer something in a very convincing manner.  The buyer finds the offer very attractive (even exciting) – and the sales patter very convincing. In an ethically and morally correct world, the adviser would calm the excitement down and talk the investor through the finer details of the transaction.  Just like Tom – the mattress sales guy curbing my desire to bounce on the beds – a financial adviser should really get to know the potential client before (in fact, long before) advising what is the right solution.  In so many cases, the best thing is to leave the pension where it is – but this can only be determined after a proper fact find and risk profile.

In reality, some advisers are not really advisers at all – but salesmen.  They don’t investigate their potential clients’ facts, needs, and risk profile.  All they want to do is make a sale and earn as much commission as possible as quickly as possible.  They are not interested in giving proper advice. The seedy salesmen of the offshore financial services world will make empty promises, and stick their clients’ funds into an unnecessary death bond (such as OMI, SEB, Generali, RL360 or Friends Provident).  Then they will invest the funds in expensive, poorly-performing, risky funds or structured notes.

It is important to be aware that commissions of 6%, 8%, 10% and above are the norm for financial advisers that sell death bonds and risky, unregulated investments. In a profession where there are good standards of financial advice and in jurisdictions where regulators are at last beginning to recognise the urgent need for robust regulations (and enforcement) there are some advisers who do act ethically.

Good financial advice always starts with the fact find. This should be a deep and detailed summary of the client’s circumstances.  To arrive at an accurate and meaningful fact find and risk profile, there must be a comprehensive set of questions and review of financial documentation, life assurance, pensions and savings.

According to Forbes the 10 important question a financial adviser ask should be

1. What are your most important financial concerns?
2. How do you make important investment and financial decisions?
3. How do you envision your life 1 year from now? 5 years from now?
4. What changes do you expect in the future in your finances that you wish to plan for?
5. Is your outlook generally optimistic or pessimistic concerning the future?
6. What are your most important non-financial concerns and objectives right now?
7. Have you ever worked with a financial advisor before?  
8.  What are they keys to making the financial advising relationship successful for you?
9. What would you like to accomplish through financial planning?
10. Why do you think you need help?

These questions are just the beginning. The second part is the risk assessment. There are many types of investor but the majority of people are conservative, keep it safe, type investors. As you can imagine, this is completely normal. If you have worked and saved all your life to accumulate a pension pot, you will want to look after it.

If you were a gambler, you would have been taking your wages down to the local betting shop every time you got paid. People don’t just become gamblers when they retire. If you have saved so hard for a pension, you are not going throw it away on an unnecessary pension transfer laden with risk, high charges and hidden commissions – and probably a scam.

Yet this happens all too often – both offshore and in the UK.  People get scammed into a transfer they don’t need; a death bond they can’t afford and investments that will destroy part or all of their life savings.

Smart people do get scammed because smart people are usually the ones with bigger pension pots. The scammers know this and they have developed techniques to sell their rubbish to these hard-working people.

A proper risk assessment comprises:

1. identifying and analysing potential events that may negatively impact individuals, assets, and/or the environment; and

2. making judgments “on the tolerability of the risk on the basis of a risk analysis” while considering influencing factors. (Wikipedia)

So what is the difference between unethical financial advisers who are only interested in their commission, and my mattress salesman Tom?

Tom’s business relies on satisfied customers who will appreciate his good advice – including the fact find and risk profile – every night of their lives until they change their mattress.

Unethical, commission-based financial services salesmen posing as advisers care nothing about their clients’ interests.  All they want to do is “pump and dump” and then move onto the next victim.  Once they’ve flogged a death bond and some expensive, no-hoper funds or structured notes, their only interest is to enjoy the proceeds of what is – in reality – theft.

We have created an animated analogy on how important fact-finding and risk assessing are – they are literally matters of life and death.