(Taken from an article by Martin Lewis, MoneySaving Expert – Jan2015)
Taking financial advice is going to cost you. But when it comes to making life-changing financial decisions, it might save you money in the long run. This guide will help you understand what a financial adviser is and whether you need to use one.
It’ll explain the questions you should ask and, most importantly, how much it’ll cost.
WHAT IS A FINANCIAL ADVISER ?
Throughout your life you’re likely to need different financial products. A financial adviser can help you make the right decision about the best product for you. While the advice isn’t free and DIY options are available, if you’re looking at getting a complex product, even the money-savvy see the value in paying for an adviser to ensure they get it right.
There are two types of financial advice you can get, independent or restricted:
• Independent financial advisers (IFAs):
If an adviser is ‘independent’ or a firm advertises that it gives ‘independent advice’ this means that it’s able to advise and sell products from any provider right across the market. Therefore you should get the very best advice and products tailored just for you.
• Restricted advisers:
In contrast, and as the name suggests, if an adviser or firm is restricted it can only recommend certain products or product providers to you. The adviser should clearly be able to explain the nature of the restriction to you, but if you’re not sure, ask.
If you’re using an adviser, always make sure it’s an independent financial adviser. If you’re going to get professional advice, check it’s from an IFA. This is best if you’re starting out with financial advice, as it’s often difficult to identify why restricted advisers are restricted. Some will be restricted by products they advise on (not always bad), and some by provider (often bad, as other providers may have better deals).
WHEN WOULD I NEED AN ADVISER ?
If you’re looking at complex financial products, it can pay to get advice if you’re not sure or not confident doing the research yourself. Some of the main products that financial advisers deal with are listed below. Even if you’re going to use a financial adviser to get one of these, it’s a good idea to buff up on what you’re getting before you meet. That way you’ll feel more in control of the decision-making process.
• Annuities: An annuity is the product you trade your pension in for when you retire, in order to get a regular income for life. More on annuities.
• Financial or tax planning: The more money and assets you have, the more complex financial planning gets. There’s a range of sometimes impenetrable products that can be useful but are also tough to understand. Here a good IFA can really prove their worth.
• Investments: Choosing an investment is about assessing the risk and trying to second-guess the markets. It’s important to remember advisers don’t have a crystal ball; their choices for you are best guesses, not certain knowledge. More on investments.
• Mortgages and equity release: Another huge financial transaction, so advice is a boon. Remember you’ll get an adviser, not an instructor. So the most important thing is always to make sure you at least know the basics beforehand. Please read our free guides to First-time Buyers or Remortgaging. More on mortgages and equity release.
• Protection insurance: Life insurance, critical illness, and income protection can all be complex products, with many exclusions. In some events, it can be done cheaply without an adviser, but those with less than straightforward family arrangements or health issues, will find help useful.
• Pensions and pension transfers: Getting a private pension these days is often a simple case of picking the right provider (or joining the one your work provides – see the Pension Need-To-Knows guide). But pensions can be very complex, especially for those who want to transfer a sizeable existing pension. In this case, you may want to get an IFA’s input.
HOW MUCH DOES FINANCIAL ADVICE COST ?
For years, IFAs were paid in one of two ways – either by fees (you paid upfront) or commission (they took an ongoing cut, which varied per product). By law they were required to give you the option of either. But since 31 December 2012, IFAs have been banned from accepting commission from providers on products, such as investments and pensions. Instead, they must charge a fee they agree with you.
All advisers can still accept commission from providers for life, critical illness and income protection insurance policies, and mortgage broking. Here, advisers take a cut every month that the product is held. This may seem free to you, but your money still pays them, just over a longer period instead of upfront – and it often adds up to a much higher cost.
HOW MUCH WILL FEES COST ME ?
This will depend on whether you pay an hourly fee, a flat fee or a ‘commission-style’ fee. Often the inital meeting or conversation with a financial adviser where they find out what sort of products you need is free, but check just in case you get landed with a bill. From then on, you’ll have to pay. You can do this in three ways, depending on which adviser you pick:
• Percentage fee: This is the most common way for advisers to charge, perhaps because it most closely resembles how they used to charge under the commission model. It’s based on a percentage of the money you want advice on or managed.You’ll usually pay an initial percentage charge for becoming a client and investing your money, then an ongoing percentage charge for each year that they continue to manage your money. This percentage can range anywhere from 0.5% to 5%, so make sure you ask.
• Fixed fee per service: These fees are charged each time you go to the adviser for different ‘projects’, such as consolidating your pensions, or investing. These are best for people that don’t want ongoing advice and just need help with a specific job.
• Hourly charge: Some advisers are moving more to a model which resembles solicitors or accountants and charging on an hourly basis. If you choose to go down this route, make sure you’re given a full breakdown of the work they’ve done and how long it took. Hourly charges can be anything from between £50 to £250 an hour, so make sure you ask before you go ahead.
HOW DO I FIND A FINANCIAL ADVISER ?
First things first, speak to family and friends and find out if they’ve used an independent financial adviser in your local area. Of course, just because they’ve had a good (or bad) experience with them, it doesn’t mean that you’ll have the same experience, but it’s certainly a good starting point.
Failing that, the following websites are a good place to start:
• Unbiased.co.uk – Has a network of 15,000 advisers (both independent financial advisers and restricted whole-of-market advisers). Just enter your postcode and it will list your local advisers. It also allows you to search by speciality, gender, payment options, advice areas, level of wealth and adviser qualifications, so you can find the best adviser. The site does a weekly check to verify all advisers are registered with the regulator, the Financial Conduct Authority (FCA).
• VouchedFor – Unlike Unbiased, VouchedFor only features independent advisers. The website hosts reviews of IFAs, and checks them to make sure they’re from genuine clients.
WHAT QUESTIONS SHOULD I ASK AN ADVISER ?
Don’t feel embarrassed. You’re potentially going to be transacting a lot of money via this person, so you have every right to ask questions and make sure you’re confident in your decision.
Usually your first meeting with a financial adviser is free, so you’re under no pressure to use them if you’re not impressed, or you simply don’t ‘click’. If you go in armed with the below list of questions (and any others you have of your own) you’ll be best placed to make a decision.
• Q. Are you independent or restricted?
A. This is probably the most important question you can ask and it’s best to make it your first so you know where you stand. An independent financial adviser will be able to search the whole of the market to get the best product for you, and must be entirely unbiased to call themselves independent. Read more on the difference.
• Q. How will I receive the advice?
A. You should ask whether the advice will be given to you face-to-face, on the phone, via email or in a report. If you have a preference, ask if there are different prices for each.
The adviser should send you an outline of their recommendations, which is usually called a ‘suitability report’. Read and check this carefully to ensure it reflects the discussion you had with the adviser and that you understand why they recommended a particular product.
• Q. Are you authorised?
A. The FCA monitors firms to check they are qualified and above board. Before you meet any IFA, do a quick search on the FCA’s website to check they’re fully authorised.
• Q. What qualifications do you have?
A. The FCA requires all IFAs to pass what they call ‘Level 4 qualifications’ – so you should be looking for a diploma-level certificate, such as the Diploma in Financial Planning (DipFP) (formerly the Advanced Financial Planning Certificate), or even better, the Advanced Diploma in Financial Planning (ADFP). Read more on qualifications.
I GOT THE WRONG ADVICE – WHAT CAN I DO ?
If you feel you’ve been mis-advised, you need to collect as much paperwork as you can find, then write to the firm that sold you the product and explain clearly and concisely why you think the advice you were given was wrong.
If you’re still not satisfied with the firm’s response, you have the right to take your complaint to the Financial Ombudsman Service, which can award compensation. This is a free service, so never pay to reclaim, you’ll just lose even more money.
For full details on how to claim, go the Financial Ombudsman Service website. Remember, when it comes to investing, ‘low risk’ isn’t the same as ‘no risk’. You can still lose your money. Provided the adviser has explained this, there are no grounds for complaint. However, if they told you that you couldn’t lose money with a product, and you did, then you were mis-advised. In a nutshell, for investments you’re complaining about the way you were sold, not the performance of a product.
(Martin Lewis – Jan 2015)