Five-minute guide to finding the right financial adviser
You might not think it but choosing a financial adviser could be one of the most important financial decisions you ever make.
If you choose wisely you'll have an invaluable inside track on the financial industry that can help you put in place plans to secure your future.
Regardless of whether you want to maximise returns from savings, start a pension, put money away for your children or buy life insurance, it makes sense to have an experienced hand who can point you in the right direction.
However, finding that person is not always as easy as it sounds.
Make the wrong choice and you could end up regretting your decision: every year thousands of people claim to have been left seriously out of pocket after receiving poor advice as a result of either incompetence or, even worse, fraud.
The most shocking example of financial fraud in recent years involved Bernie Madoff. The 71-year-old financier was given the maximum 150-year prison term in the US for masterminding a £38 billion fraud.
His ponzi investment scheme affected thousands of investors, including high-profile names such as movie director Steven Spielberg and actor Kevin Bacon, and ruined the lives of many more ordinary people.
Madoff may be at the extreme end, but there are plenty of other examples closer to home. More than 3,500 people have complained to the Financial Ombudsman Service (FOS) over the past year about the quality of advice they received.
Such statistics could easily deter you from looking for an adviser at all. But Karen Barrett, chief executive of unbiased.co.uk (the website set up to help consumers find good advisers in their area), insists that would be a mistake.
"Seeking professional financial advice can feel daunting, but it's an invaluable step in making sure you get the best solutions for your personal finances," she explains.
"An adviser can give expert advice on complex issues such as pensions, investments, long-term savings and mortgages."
However, if you want to get reliable financial advice you need to do more than just opening the phone book or stepping into your bank.
Before consulting any adviser you must get an understanding of how the industry operates, and perhaps more importantly, how your adviser will be paid.
At present there are three types of adviser: independent, tied and multi-tied. According to Barrett, independent financial advice is the gold standard.
"These advisers are able to offer access and guidance on all products from across the whole market," she points out.
Tied advisers work for a financial services firm such as a bank, so their advice will be based solely on the products they sell. Multi-tied, as the name suggests, are advisers that can offer a wider but still limited range.
Adding to the confusion is the fact advisers will be paid in different ways. They can either charge the client (you) for the advice given; take commission from products sold (via the provider); or receive money from both sides. It depends on their business model.
Commission or fee?
There are different levels of commission, based on the products offered, as well as on the size of the advisory firm and the relationships it has with providers. Some areas of business, therefore, may be particularly lucrative for individual firms.
Make no mistake, even if you don't pay it upfront, you will be paying this commission indirectly – in the form of charges on your investment or product. Providers don't pay the adviser out of the goodness of their hearts.
The alternative is to pay a fee, which will either be charged on an hourly basis or quoted as the price for the job. This may seem more expensive but at least you can be sure you haven't been sold a product based on the size of the commission that the adviser receives.
The problems associated with accessing advice have led the Financial Services Authority (FSA) to overhaul the whole system as part of its wide-ranging regulatory shake-up, known as the Retail Distribution Review.
From 1 January 2013, the various adviser types and charging structures involved in retail investment product sales will be replaced with two - independent and restricted - so clients will know exactly what they're getting for their money.
Only those who can advise and suggest products from the whole market will be deemed independent, while those offering a more limited range of options will fall into the restricted category.
The charging regime will also change. "Advisers, both independent and restricted, will no longer be able to receive commission from providers for selling their products," explains Justin Modray, founder of website Candid Money.
"They must agree a fee with you and you'll have the option of paying them directly or agreeing with the provider for the money to be taken from the investment. As financial products will no longer have commissions built into their charges, costs should fall."
In addition, there will be greater uniformity in qualifications. No-one will be able to dispense advice unless they have attained at least QCF Level 4 – as laid down by the Qualifications and Credit Framework – which is equivalent to the first year of a degree.
So what are the potential pitfalls of taking advice and how can you avoid them?
Integrity of advice
First, make sure the firm is authorised by the FSA. If it's not, then you won't enjoy the protection of the Financial Ombudsman Service or the Financial Services Compensation Scheme.
Also ensure the IFA is not on the FSA's 200-strong list of unauthorised companies and individuals offering advice.
Next, you need to take a closer look at prospective firms – and this is where the process gets more difficult.
The most common criticism, Modray says, is that advisers compromise the integrity of their advice by recommending products that pay them the most commission, rather than those that are most apppropriate for their clients.
"It's really important to ensure the adviser doesn't take all their commission or fees upfront, otherwise they'll have no financial incentive to continue looking after you and could end up losing interest," he suggests.
Other problems include a lack of expertise in specialist areas, excessive fees, failure to choose products from the whole market, and recommending product switches simply to pocket extra fees.
Specialist knowledge is required when it comes to choosing which investment funds will be most suitable for individual clients.
Unfortunately, that was not the experience of Roy Midwinter, a 63-year-old electrician from London, when he spoke to an adviser about the best places to put his life savings.
"When I asked him to recommend an investment fund he started thumbing through the pages of a financial magazine to see which had performed the best over the past couple of years," Roy recalls. "I was horrified, to be honest."
Fortunately, he didn't follow the suggestions and showed the adviser the door, but it's a worrying example of someone hiding behind an obvious lack of knowledge, so be on your guard when you're considering who to trust with your money.
Even newcomers to the investment world know the regularly uttered mantra that 'past performance is no guarantee of future returns'.
There are plenty of reasons why a fund may have done particularly well in recent months but its returns might not be sustainable in the long term.
Of course, it sometimes comes down to gut feeling. Susan Andrews, 36, from London, had a miserable time when she decided to consult a financial adviser about buying life insurance after the birth of her son, Jake.
"I disliked him on the spot. He was aggressive, dismissive of my questions and didn't listen," she recalls. "I kept telling him I had life cover for my mortgage and asking whether it would make sense to roll the two types of cover together, but that seemed to go in one ear and out the other."
After prevaricating for a few weeks, she decided against her better judgment – which she attributes to the sleep deprivation of having a newborn baby – to put aside her misgivings about the adviser and take out the cover.
"I didn't want to give him my custom, but I looked through the cover and realised it did what I needed," she adds. "I still have the policy, but in the back of my mind I have no confidence he has sold me the right thing."
A happy and healthy relationship
However, finding an adviser you like and trust can be the start of a long and happy professional relationship. Their support has certainly been very helpful down the years to Jain Lawes, a 49-year-old company director from London.
She has opted to employ the services of a number of specialist advisers – especially for complex areas such as pensions.
"Where the rules are forever changing, I've found it better to use a financial adviser," she explains. "They have also been able to prepare a schedule of all my savings, with an outline of how to draw on them in a tax-efficient way when I retire."
For some years, she has also had an adviser to manage her pension savings. "He can be more dispassionate about when to invest, and more importantly, when to dis-invest," Jain adds. "I'm now considering asking him to look after my ISA money."
How does she choose her advisers? "I like someone who's well qualified but younger than me, so they'll still be around when I retire," she says.
"I also want someone with whom I feel comfortable, who can explain things clearly without making me feel like an idiot."
Five steps to finding a good adviser...
- Be clear what you're looking for. For example, is it specialist investment advice or more general financial planning?
- Look for advisers using sites such as unbiased.co.uk and moneywise.co.uk/find-an-ifa. You can search for one based on locality, gender, qualifications or even specialist areas. Also ask friends and family for their recommendations.
- Make sure the firms are authorised by the Financial Services Authority (fsa.gov.uk) and, perhaps even more importantly, check they don't feature on the unauthorised list.
- Talk to prospective advisers. Find out what type of adviser they are, how they are remunerated, what qualifications they hold and how much they may charge.
- Finally, ensure you both like and trust them. IFAs can help you through some difficult life stages like bereavement or divorce, so it's essential you get along.
...and what to do if you don't
Complain to the adviser in writing
Write 'complaint' clearly at the top and be brief and to the point. Remember to include details such as policy numbers. Explain your grievance and what you want to happen. Keep copies of everything you send.
Get help from the ombudsman
If you're not satisfied with the response, go to the Financial Ombudsman Service, the independent body whose job it is to help settle disputes.
If it finds in your favour it can tell the business to put you back in the position you would have been had the problem not occurred, pay you compensation for inconvenience, and direct the firm to take action to put right what has gone wrong, or simply apologise.
Need more help?
In the vast majority of cases, the businesses concerned will comply with the ruling made by the Ombudsman. In the case of a rare exception, you can take the case to court. You can also go to court if the Ombudsman finds in favour of the adviser. However, a court is likely to reach the same decision.
For financial advise you can trust go to www.ifa.net
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.
If you’ve have a complaint about a financial service product you have bought but the company you bought it from refuses to resolve your problem after eight weeks, the Ombudsman can help. The Ombudsman will investigate and resolve the matter. The Ombudsman is independent and its service is free to consumers. The Ombudsman may find in the company’s favour but consumers don’t have accept its decision and are always free to go to court instead. But if they do accept an Ombudsman’s decision, it is binding both on them and on the business.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.