There are many reasons for taking financial advice. You might be looking for a better return on your investments, wanting pension advice to ensure you have security in retirement or simply trying to avoid financial decisions you may later regret.
While advice can give your finances a major boost, many people are put off by the charges. Others have shunned advice because they find it too intimidating and are left managing their finances themselves, or not at all.
Advice can take many forms and it it is important to understand exactly what different kinds of adviser can offer.
Independent financial advisers (IFAs) offer the most comprehensive advice, as they consider every aspect of your financial situation before dispensing advice that is fully tailored to your circumstances.
IFAs make independent recommendations based on the entire market and don’t earn any commission from providers – they are paid directly by the consumer.
Other advisers are known as restricted advisers, as they are either limited in the type of products they cover – such as only advising on pensions – or can only offer products from a narrow panel of providers.
These advisers should tell consumers in what way their service is limited before offering any advice to a consumer, although many make this difficult to find out. Just 38% of restricted advisers made their status clear on their websites, according to a 2017 survey conducted by financial services marketing firm, the Yardstick Agency.
Note that those offering advice may not always call themselves advisers. For example, chartered or certified financial planner are ‘gold standard’ terms used to describe advisers who take a longer-term view of their clients’ situations and who hold professional financial planning qualifications.
Those advising on mortgages or protection are often referred to as brokers and while they offer regulated advice, they usually earn commission when they recommend a product. This should not affect the quality of their advice, although the Financial Conduct Authority (FCA) is currently investigating whether this could lead to a conflict of interest.
How much does advice cost?
High cost is often seen as the biggest barrier for people who want advice. Unbiased.co.uk, the adviser-finding platform, says that the average hourly fee in the UK is £150. Fees can be even higher depending on the level of service provided and where you live. Meeting face to face also tends to cost more than phone-based services.
Advisers could also charge a flat one-off fee, a monthly retainer or a yearly percentage based on your investments.
As an example, full at-retirement advice on a £200,000 pension pot should be expected to set you back £2,500 [based on around 16 hours’ work]. This is a significant outlay and for this fee an adviser should:
- collect and analyse information about your finances, tax status, and existing products;
- determine the most appropriate tax efficient wrappers and investment strategy to meet your goals
- talk to financial providers on your behalf;
- present a detailed report on your circumstances and objectives; and
- make recommendations and set up policies for you.
Yet wildly different charging structures have led to consumer confusion. Some advisers have been accused of not making it clear to clients what service they will receive.
There are no industry-wide standards, and the Yardstick Agency found that only 35% of IFAs actually displayed their fees clearly online.
The FCA has stated as recently as April that “relatively few advisers” are transparent about their pricing.
Even advisers themselves suggest costs are a big issue. A survey by the Association of Professional Financial Advisers in January 2016 found that 43% of financial advisers had turned away potential consumers because it would not have been economic for them to pay for advice.
Yet advice can also make sure you avoid mistakes. Matthew Harris, an IFA and owner of Dalbeath Financial Planning, says he was able to save John Clegg* thousands by making sure he didn’t take early retirement, even though his employer was recommending it.
John was offered early retirement at age 55, which would have resulted in an annual pension of £23,763. However, by delaying retirement to 65, his pension income would be £49,297 a year.
Mr Harris calculates for each year of early retirement John was sacrificing approximately £2,500 of additional annual pension income. By retiring at 65, taking into account charges, his overall pension income will be more than £250,000 higher by the time he reaches age 85.
“Decisions over when to retire are among the biggest financial choices a client will ever make,” Mr Harris says. “Without advice it can be tempting to convince yourself that things will be fine, when you could actually be walking into a financial mess.”
Go your own way
So when should you pay for advice and under what circumstances can you do it yourself? Some consumers use ‘robo advice’ firms, such as Moneyfarm, Nutmeg and Wealthify, which use algorithms to manage investments with little human intervention.
These firms promise to deliver financial advice at a cheaper cost than face-to-face advisers.
But Ian Else, independent financial adviser at Ovation Finance, says: “So far, the ‘advice’ in robo advice seems sadly lacking.” He argues: “Yes, it will tell you how to invest your money, but that’s just a small part of what a good adviser does. A robo system can’t coach or help tease out objectives; it can’t challenge; and it can’t pick up on body language.”
Meanwhile, the rise of sites such as ComparetheMarket, GoCompare and MoneySupermarket has been a boon for people looking to save cash.
Consumers can also use these sites to conduct their own searches and take out insurance products and secured loans with ease. But buying a product in this way is very different to taking advice. The clue is in the name as price comparison websites can tell you which products are the cheapest, but not whether they are suitable for you.
Cheaper products may have more restrictive terms and conditions and these are not always made clear. A cheap health insurance policy may not cover certain illnesses, and these complexities are not always easily understood.
Price comparison sites stay clear of areas such as pensions and retirement, but there is some free assistance out there.
Charity Citizens Advice and the Money Advice Service can offer some free guidance on general finances, while Pension Wise and the Pension Advisory Service are free services for those thinking about retirement.
Some people also manage their own affairs – including long-term investments – entirely, and their dealings with financial firms are on an execution-only basis, which means the consumer has chosen not to receive advice at all.
Patrick Connolly, chartered financial planner at independent financial adviser Chase De Vere, says these are consumers who already have significant financial knowhow.
“Those who are confident can make their own investment decisions and don’t necessarily need to pay for financial advice,” he says.
Who should take financial advice?
There is a common misconception that only people with large personal wealth should get financial advice. While those with a large amount of assets are the most common candidates for advice, it is wise to consider advice when you reach a key milestone in your life. In years gone by, salesmen – the famous ‘man from the Pru’ – would visit customers in their homes to stress the importance of insurance and pensions, but this is no longer the case.
“It never too early or late to get advice, each client is likely to have different needs at different life stages,” says Mr Else. “But with the demise of the ‘man from the Pru’, people are saving too little too late and don’t even think about protection needs. This must change.”
Advice is particularly useful if you have unusual circumstances. In the mortgage market, those who are self-employed or on an interest-only take out a loan with a high street provider. A mortgage adviser has indepth knowledge on which providers are most receptive to a borrower’s circumstances and can help find the right lender.
People nearing retirement are also good candidates for advice, especially with recent pension freedoms making it easier to take a pot of cash out as a lump sum.
Mr Connolly is concerned that consumers are making these decisions without appropriate help. “Too many people are making complex financial decisions without taking advice, which is potentially exposing themselves to great risks in the future,” he argues.
“A good example is the number of people who have gone into pension drawdown without taking advice. It could be that these people are gambling with their standard of living in their later years if they make the wrong choices, as many are likely to do.”
How do you pick a financial adviser?
The best recommendations come via word of mouth, so chat to friends and family who have taken financial advice.
Advisers often advertise locally and there are online databases such as Find an Adviser, Unbiased and VouchedFor, which can help you locate an adviser in your area.
You can check whether an adviser is regulated by using the FCA’s Financial Services Register and always ask what qualifications the adviser holds before you meet. Most importantly, ask them to set out exactly what they charge and what they will provide for the money.
Ask how often the adviser wishes to contact you and how advice will be given. This is often face to face or over the phone, but some firms offer written financial reports that can be sent by post or email. Make sure they outline exactly what services they offer as company names might not illustrate the full range of products. For instance, many mortgage brokers will also offer insurance advice. You should also ask if the adviser you are meeting will be the person managing your money or if other advisers at the firm will be involved in future.
Mr Else says: “Personal recommendations are always a good start and higher qualifications are a sign of the adviser’s commitment to professional standards, but neither of those things guarantees a great experience. Ultimately, it comes down to that first meeting. Does the adviser seem genuinely interested in you and not just your money?”
But when even the regulator is expressing concerns that “consumers who take advice may not be getting value for money”, then you need to make sure the benefits of advice will outweigh the cost.
If you can’t afford advice, then make sure you are doing the basics yourself. This means paying off debts, having insurance, building cash savings, paying off your mortgage and joining a pension scheme.
* Name has been changed.
What are the different ways advisers structure their fees?
Percentage charging – the adviser charges a fee, which is a percentage of your portfolio’s total value. This is typically between 0.5% and 1%, but some charge more.
Flat fee – an adviser charges a set price for a single service, such as setting up an annuity. Some advisers charge a fixed retainer fee each month for managing your assets on an on-going basis.
Hourly rate – an adviser charges an hourly rate for his/her services.
Commission-based – IFAs are not allowed to earn commission when they advise on investments and pensions. However, commissions are usually paid when advisers sell mortgages, equity release and general insurance policies. This means the financial provider pays the adviser a percentage commission for selling the policy.
“It gives us peace of mind”
Peter Davies (pictured below) is a 69-year-old retired former council worker who lives near Southampton with his wife, Sue. He first sought advice when he sold a property he had inherited and didn’t know how to invest the proceeds of the sale.
He previously received restricted advice from a building society, but his financial adviser today is Eunan Carr, who works at Chase de Vere in Basingstoke.
“I just wanted to know how best to invest the money,” says Peter. “I knew there were tax reliefs on some products, some of which I already had, but he gave me advice on the best way of doing it all.”
Even though Peter is retired, he was advised to continue investing in pensions, as they offer him the most tax-efficient solution. Tax relief of £720 has boosted his £2,880 pension pot, increasing his investment to £3,600.
Mr Carr has also transferred other investments into a tax-efficient Isa to reduce Peter’s liabilities and has helped set up life insurance policies and a lasting power of attorney (LPA) with his wife. Peter had been keen on funeral planning, but as he is healthy he was advised to take out a life insurance policy, which is cheaper in the long run.
While he pays a 1% fee to the adviser firm each year, Peter believes the money is well spent.
“It gives us peace of mind,” he says. “I feel like I’m better off, even after I’ve paid these fees. You don’t need a lot of wealth to make it worthwhile.”
The adviser also looked at the best way to gift money to his son, using allowances that are exempt from inheritance tax, such as the annual exemption of £3,000. As Peter made no gifts in the previous tax year, he was able to roll over this allowance as well, meaning an inheritance tax- free gift of £6,000 is allowed this year.