Investment advice from an independent investment planner is crucial when weighing up ”tied investments” deals now on offer from lenders, according to a new study from the European Commission.
Banks and building societies in many of the 27 EU countries are now offering consumers special deals on one savings product or investment, provided that they also sign up for additional services or an additional investment at the same time. However, such “tied” deals involving 2 linked products are not always in the best interests of the consumer, according to the EU, and investments advice from an independent investment planner is essential, to evaluate the overall benefit.
In the UK and throughout the EU, the most common such deal relates to bank current accounts, offered only if a salary is lodged into the account each month. However, mortgages and loans are also widely-used as ‘gateway’ products to sign customers up for additional business. In many instances, consumers are required by their investment adviser to sign up for an extra credit card, when seeking a loan.
In the UK, one such example of a tied product is Yorkshire Building Society’s attractive rate of 6% on investments in its Combination Bond, which is available only if you simultaneously invest the same amount in a Legal & General investment bond.
Santander and Saffron Building Society also offer tied deals, but stress that this happens only in conjunction with investments advice to their customers. However, since the investment planner giving the investments advice is an employee of the lender, there is no independent aspect to the investments advice received.
The result may be that the customer sets up an investment in a bond product which they otherwise might have neither sought nor taken, and the value of which can fall as well as rise, the EU concluded.
Another potential disadvantage of tied products is that they form a double link, which limits the customer’s freedom to switch to another lender. The EU estimates that investment advice which leads customers to take on tied products has created a total of 572 million contracts which would be switched, if the customer were not tied and felt they had greater mobility.
The EU report criticised lenders offering tied products for imposing ”choice distortion” on consumers, by limiting their options in the marketplace, and called the condition of having to take an additional product or service a “coercion factor” resulting in an investment decision that otherwise might not have been made.
Independent investment advice by a qualified investment planner capable of a full market overview may help the consumer evaluate the overall benefits and risks associated with such two-part tied deals.
