What is a financial adviser?
A financial adviser is a qualified professional whose job it is, essentially, to put your financial house in order. This means making the most of the possible tax breaks available to you in your pensions and ISAs, assessing how much risk you can afford to take (and feel comfortable taking), looking at your financial goals and making a plan to help you meet them.
By providing these services, advisers take on the responsibility and liability for the advice given. If you were to do this yourself, you would be responsible if anything went wrong and you lost money. Being a qualified and authorised professional, an adviser takes on that responsibility themselves. This means if it turns out that their recommendations were not suitable you are entitled to compensation. It doesn’t mean you can get compensation if your investments lose value – only if they were not suitable to your risk level.
There are broadly two schools of financial adviser: independent financial advisers or IFAs, who consider the entire market of available financial products in formulating their recommendation, and restricted advisers who choose from a smaller pool of products, usually those from a single provider. You’ll often find restricted advisers working at companies that provide both advice and financial products.
Advisers pay a levy towards the Financial Services Compensation Scheme, which provides compensation to investors or customers when a financial firm or bank goes bust.
Advisers are regulated by the Financial Conduct Authority (FCA). Be very wary of any adviser that is not regulated by the FCA, as they do not carry the same responsibilities and may be operating illegally.
What does a financial adviser do?
Financial advisers provide a variety of services under the umbrella of financial advice. These often include inheritance and estate planning; saving for retirement; helping you decide what route to take in terms of funding your retirement – in other words, whether to buy an annuity or live off your investments using drawdown; and generally just making sure your investment portfolio (in its part as a slice of your total accumulated wealth) is appropriate for your risk appetite and needs.
We have already touched on the differences between independent and restricted financial advice, but it is useful to understand the nature of the advice they both offer in a bit more detail. In order to be truly independent, an IFA must consider all products available from all providers when putting together their recommendation for you. Generally speaking, getting independent advice can be comforting because you know the adviser isn’t simply trying to sell you his or her company’s products.
However, there are times when a restricted adviser could suit your needs. If you trust your bank, for example, and have relatively simple needs, then a bank adviser might be the option you are most comfortable taking. Some advisers call themselves ‘restricted whole of market’ but this is not a term recognised by the FCA, but does distinguish between restricted advisers that will only recommend products from a limited panel of providers. Restricted whole of market advisers are not independent for the simple reason that they don’t consider certain product types, even though for the products they do consider they look at everything that’s on offer.
It’s not clear one way or the other which route is cheapest – some restricted advisers are inexpensive but others are more expensive than your average IFA.
When should I use a financial adviser?
Most people are prompted to seek out advice by a life event – be it something potentially positive like a windfall, or something negative like a divorce, redundancy, or death of a loved one.
It’s generally a good idea not to leave it too late to plan for retirement. Talking to a financial adviser in, say, your mid-40s to get a retirement MOT will either set your mind at ease or spur you into action.
Then, when you are closer to retirement, it is a good idea to seek financial advice on how to achieve the retirement you have hoped for. Here, it could be helpful to speak to someone who will look at all possible options as they put together their plan for your later life.
In some cases you will be legally obliged to seek financial advice. For example, if you are trying to move more than £30,000 of guaranteed benefits from a defined benefit pension scheme.
What are the advantages of financial advice?
As mentioned above, when you take financial advice your adviser takes on some of the responsibility for your financial well-being. They are obliged to recommend a plan that is appropriate for your own individual circumstances, and if it turns out that they have made an unsuitable recommendation, you could be due compensation.
Advisers pay a levy to the Financial Services Compensation Scheme, (FSCS), which can compensate consumers when and if a member firm goes bust. If you think you’ve been given bad advice, first make a complaint to the company who provided the advice. If they don’t handle it satisfactorily, you can use the free Financial Ombudsman Service who will decide if your complaint is valid and what recompense you are due.
Regulated financial advice can also keep you from making serious mistakes with your money – traps into which even the most experienced investors sometimes fall. For example, this story recounts the waking nightmare experienced by customers of a FCA-regulated (but not FSCS-covered) foreign exchange firm that went bust.
How do financial advisers make money?
Financial advisers generally make money from your money. Years ago, financial advisers wouldn’t charge customers up-front but would rather get paid by product providers when they made a sale, in a process known as trail commission. In 2013 new rules came into force under the Retail Distribution Review (RDR) banning commission and instead requiring advisers to charge clients directly. There are several different ways that advisers charge clients. Most advisers will have their first meeting with you for free, although they won’t provide any actual advice at this first meeting.
If you get a one-off service then they will likely charge you a flat rate for the work involved. If you agree to get an ongoing service from them, then they will take an annual fee. This fee is, either usually equivalent to a fraction of a percent of the amount of money they look after for you, or a fixed amount. Keep in mind that if the adviser is taking an ongoing fee, they must be giving you an ongoing service. In the old commission days, they could earn an annual fee just by selling you a product once.
Actual amounts vary quite a bit. According to the Money Advice Service, advisers’ hourly rates typically vary from £75 to £350 an hour, with the average at £150 per hour.
Fixed fees can be anywhere from hundreds to thousands of pounds.
As for ongoing fees, these vary as well. Be wary, however, of any amount approaching 1 percent of your assets – that is on the expensive side..
If you have substantial assets, a fixed-fee service could be the most cost-effective route. Conversely, if you have a relatively small portfolio a percentage fee might work out in your favour. However, remember many adviser firms are small businesses so could turn you away if the work won’t be commercially worthwhile for them.
How to find a good financial adviser you can trust?
Admittedly there is a bit of a trust deficit when it comes to the public perception of financial advisers. This follows several high-profile mis-selling scandals, as well as the general pre-RDR salesmanship of commission hungry sales people.
However, there are many good advisers out there who provide an excellent service for their clients.
Ask friends and family for personal recommendations if they have had a good experience. But also do your own research as there are a number of services available that can help you find a reputable adviser including VouchedFor*, Unbiased, Financiable or the Chartered Institute for Securities & Investment’s WayFinder. Hargreaves Lansdown, one of the UK's largest firms providing restricted financial advice, is offering a £200 John Lewis voucher* to new clients.
You can check an adviser's qualifications on the Chartered Insurance Institute’s website, an adviser who is either Chartered or Certified is considered well qualified. You can also use the FCA’s register to check their credentials.
Should you shop around when looking for a financial adviser?
Many people take the first recommendation they are given, but shopping around can be a great benefit. Remember, many advisers do their first meeting for free, so this allows you to see if you will get along with them personally and whether you feel comfortable with their approach.
What questions should I ask a financial adviser?
Once you’re in the room, don’t be afraid to ask a lot of questions until you feel you have a good understanding of the adviser, how they work, and the services they offer.
Questions to ask include:
- Are you independent or restricted?
- If you are restricted, what is the nature of your restriction?
- What services do you offer and how do you charge?
- If you take an annual fee, what ongoing service will you provide?
- How do you assess my risk profile?
Be sure to read our article - What are the best questions to ask a financial adviser - before taking the plunge.
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