Never go to a bank for financial advice
Go to your bank for financial advice and you'll end up with a product that is both overpriced and grossly unsuitable, says Merryn Somerset Webb.
In 2005, HSBC bought NHFA, then the UK's leading adviser on long-term care spending. NHFA spent the next five years selling over 2,000 elderly people (average age 83) investment bonds. They did so with a total disregard for the needs of those in or entering long-term care.
Investment bonds were a bad idea for so many reasons it is hard to know where to start. Money that needed to be kept safe was invested in the stock market, one of the least-safe places on the planet. They tied the money up for five years significantly longer than the life expectancy of most 83 year olds. They charged high penalty fees if they were redeemed early (which, given that they were supposed to be being used to pay for care, they often were).
The bank reps flogging them failed to take any of this into account when they sold the bonds. They also failed to suggest any better alternatives presumably thanks to the fact that they got paid much more commission for selling investment bonds than for selling anything else.
HSBC finally shut NHFA down in 2010, and now says it "recognises the need to compensate victims and their families promptly". They are doing so to the tune of around £11,000 each. They have also been fined £10.5m by the FSA. That's the largest ever retail fine.
All's well that end's well, you might say. But it isn't so. The banks have a long track record of this kind of behaviour (note Barclays' £7.7m fine earlier this year) and the odd fine here or there is very unlikely to make it go away.
The truth is that neither banks nor their sales people make anyone money out of suggesting that people put their money into a savings account (the only really suitable product for an 83 year old with care to finance). But they do make money out of investment products (all those lovely fees and commissions).
That's why pretty much every investigation into the quality of the financial advice given by the banks- be it by Panorama or by Which? - concludes that it is almost entirely rubbish.
The vast majority of the people conned out of their savings by HSBC would have been much better off putting their money into an ordinary savings account and using a mixture of interest and capital to pay for their fees.
What does it all tell you? Never, ever go to a bank looking for a financial adviser. You'll get a commission-driven salesman. And that makes it almost inevitable that you'll definitely end up with a product that is over priced and most probably grossly unsuitable too.
If you want to talk about this or anything else with me, why don't we do it over lunch? Bid here