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Financial Advice

What is it?

If you need medical advice you go to a doctor. Many financial advisers like to think of themselves as the 'doctor' you go to when you need money advice. Trouble is, few would trust a financial adviser anywhere near the extent they'd trust a doctor, and some wouldn't even trust a doctor!

Nonetheless, financial advice can, in the right circumstances, prove invaluable. The key is to establish when you need advice and, if so, find the best and most cost-effective adviser for the job.

Continuing the doctor analogy: If you're suffering from a mild headache, you're probably more than capable of sorting it yourself, i.e. there's no need to visit your doctor. If you're suffering from a virus you'd probably be happy seeing your doctor, but prefer that they can prescribe any medicine on the market, not just one brand. If you need major surgery, you'd definitely want expert medical help, but this is beyond the skills of your doctor so you'd want a specialist on the case.


When should I get financial advice?

The simplest answer is: when you don't feel confident making the right financial decision yourself. Fortunately, by using this site along with some common sense, you can probably make more good financial decisions than you might think. Not all financial advice is difficult or particularly technical, so don't assume you always need to see an adviser, it could be like paying an electrician to change a light bulb!

However, it's important to recognise when using a good adviser can be money well spent. Some areas, such as inheritance tax, investment and retirement planning can, at times, be complex, especially when there's large sums of money involved. Whatever the situation, if you want/need advice then choose your adviser very carefully.


Types of financial advice

There are two types of adviser:

RestrictedIndependent

Restricted advisers can only recommend the products from several companies, often including the company or group they represent. This can be severely limiting. Even if they can sell you a product that's appropriate, it may be poor compared to others in the marketplace.

That's not to say restricted advice is always bad, many restricted advisers benefit from good training and backup from their employers (typically large banks and insurers) and the advice is often very accessible, e.g. via the high street. The products aren't always bad either.

Trouble is, would you ever want to see a doctor (no matter how good they might be) knowing they could only prescribe a limited range of medicine?

Bear in mind that whichever type of adviser you choose, there's no guarantee you'll receive good, impartial advice. It's likely there's some restricted advisers who are more honest and try to do a better job for their clients than some IFAs (albeit they probably can't give ideal advice due to the restriction of being tied).

The only thing you can safely assume is that an IFA will almost certainly be able to source better products than a restricted adviser.


How much does it cost?

Financial advisers earn their living from giving advice, so you should expect to pay for it. Up until 31 December 2012, advisers could elect to be paid via sales commissions or by charging their customers a fee. Since that date (following something called the 'Retail Distribution Review'), advisers are banned from receiving commissions on new sales and must instead charge a fee. However, as commissions may continue to be paid on existing investments/policies sold before 31 December 2012 and can continue on new sales where advice isn't given (e.g. via 'discount brokers') until April 2014, we'll also take a look at it below.

Note: fees may either be paid directly to the adviser or taken from the investment/product you're buying (for which you'll need to give your permission). While the latter saves writing out a cheque to the adviser, the fees are still coming from your pocket so don't be fooled into thinking it's a cheaper option. Always ensure you know exactly how much you're paying in fees and to whom, along with what you'll receive in return.

Fees (hourly)Fees (percentage)Commission

Hourly fees work in a similar way to if you are paying an accountant or solicitor and typically range from £100 to over £250 per hour.

If an adviser charges hourly fees you would expect them to waive or refund all the commissions they would normally receive (on pre 31 december 2012 business), resulting in lower charges or cashback respectively.

Always ask for a free initial consultation and get a quote for the work the adviser is to carry out. It's also sensible to compare at least two advisers before going ahead.

Although transparent, there's no guarantee of the quality of the advice you'll receive. Also beware that some advisers might simply pitch their fees at about the same amount they would have previously received had they worked on commission, so this isn't necessarily a cheaper route than before.


Mis-selling

The single biggest problem with commission is that it can tempt a commission-based adviser to compromise their advice in pursuit of profit, resulting in 'mis-selling'. There's clear evidence of mis-selling taking place over the years, with high profile mis-selling scandals arising from the inappropriate selling of high commission products such as pensions and endowments.

While advisers have, to some extent, been forced to clean up their act, it's hard to believe that mis-selling does not still go on. And it's not just perpetrated by shady backstreet practices, the Financial Services Authority (FSA) has found a number of high profile advisers guilty of mis-selling or other compliance failings.

Examples of adviser companies fined by the FSA for mis-selling or serious compliance failings
Company Status Fine Date Reason for Fine Link to details
Christchurch Investment Management IFA £26,000 May 2012 Failings in relation to the protection of client money. link
Towry IFA £494,900 Sep 2011 Providing misleading information to the FSA and for client money breaches. link
Norwich & Peterborough Building Society Restricted £1.4 million Apr 2011 Failing to give its customers suitable advice in relation to the sale of Keydata products. link
Cricket Hill Financial Planning Ltd IFA £70,000 Feb 2011 Failing to check the suitability of the pension switching advice they gave their customers. link
Moneywise IFA Limited IFA £19,600 Sep 2010 Failing to have sufficiently robust compliance arrangements for the investment advice it gave customers using platforms and discretionary portfolios. link
Sett Valley Insurance Services IFA £49,600 Jan 2010 A number of problems with the firm’s sales and advice processes, including a failure to record sufficient information about customers’ personal and financial circumstances to ensure the suitability of any advice they gave. link
Legacy Financial Planning Ltd IFA £28,000 Jan 2009 Failing to adequately advise investors about the risks associated with certain transactions. link
AWD Chase de Vere Wealth Management Ltd IFA £1.12 million Nov 2008 Serious failings in its pension transfer, pension annuity and income withdrawal business that resulted in mis-selling. link
Thinc Group Limited (now part of Bluefin Group) IFA £900,000 May 2008 Not having adequate risk management and compliance systems for its sub prime mortgage business and for failing to take reasonable care to ensure that it had records to prove that advice it gave to customers in relation to the sale of sub prime mortgages was suitable. link
Sesame Limited IFA £330,000 Apr 2007 Failing to treat its customers fairly by not handling complaints concerning Structured Capital At Risk Products (SCARPs) adequately. link
Source: Financial Services Authority.

These are just a few examples, there are plenty more - just take a look at the FSA's website. The above companies may well have pulled up their socks since being fined by the FSA - the list isn't intended to vilify but highlight that even higher profile advisers have gotten into trouble with the FSA for mis-selling or compliance failings.


Discount brokers

If you're happy making your own financial decisions and want bypass advisers by buying direct, there's a potential problem. Many financial product providers don't reduce their charges for customers buying direct, i.e. they continue to build in commission (for their own pockets) into their products where advice isn't given. This is where discount brokers come in, especially if you already own products that pay an ongoing commission to someone.

Discount brokers don't give advice, but will transact the purchase for you then share any commission they receive from the product provider.

While the concept is simple, the services provided by discount brokers do vary. At their very simplest, they just put their details on your application form to ensure commission is paid. Some provide various information and guidance, ranging from thinly disguised sales material to genuinely useful comment and research.

Since commissions will be banned for new business where no advcie is given from 6 April 2014, many discount brokers will have to change the way they work. Since there will no longer be any commsion to rebate (and investments should be cheaper because no commission will be built into charges) then discount brokers will probably have to resort to charging a nominal admin fee instead for providing access to lower cost investments (as already used by financial advisers).

Note: Any rebates given by discount brokers from 6 April 2013 will be subject to income tax when outside of ISAs or pensions.


Choosing an adviser

In terms of finding advisers to chose from, you could use recommendations from friends/colleagues or find a list of IFAs in your area using www.unbiased.co.uk.

Before you talk to any financial adviser bear in mind one very important point, they're in business primarily to make money for themselves (and there's nothing wrong with that per se). Now, an adviser with any sense, who plans to stick around, will realise the best way to do this is to give their customers good advice and great service. Loyal customers are invariably profitable customers. However, not all advisers and/or their employers have such wisdom or honest motives, and instead focus on short term sales targets - this is why you need to be very wary.

Check they're authorised

Financial advisers providing investment, mortgage or insurance advice must be authorised and regulated by the FCA, which can give you some protection if things go wrong. You can check that an adviser is authorised using the FCA's website.

Is the adviser independent?

Even if the adviser is an IFA, can you be sure they're truly independent? Check the areas on which they're allowed to advise and seek assurance they really do consider products from the whole of the market.

What products can the adviser provide advice on?

This may be restricted, e.g. it may not include investment trusts or more complex inheritance tax planning. Ask yourself whether any such exclusions might affect the quality of the advice you receive.

Does the adviser use a 'product panel'?

Many IFAs work from a panel of recommended products. Provided the panel is diverse and results from comprehensive research, this is no bad thing. However, a panel with only a few options and/or one based on flimsy research could restrict the quality of the advice you receive. There's also a risk that commission based advisers let commission influence the products that appear on their panel.

What qualifications does the adviser have and how long have they been practicing?

A financial adviser can gain the bare minimum qualifications required to practice within a year. Even a grey haired adviser who looks as though he may have spent a lifetime in financial services might actually have minimal experience following a career change, with little practical knowledge.

A well qualified and experienced adviser (e.g. one with 'Chartered' status) could still give poor advice, but they should at least know their stuff, especially on more complex subjects.

What financial incentive does the adviser have to continue looking after you?

Advisers who take all, or the bulk, of their fees upfront are unlikely to take much interest in you after the initial sale, unless you want to give them more business. Make sure the adviser will be sufficiently motivated to continue looking after you.


The advice (sales) process

What should you expect to happen when you see an adviser? Well, the exact process varies between advisers, but most follow a general pattern as follows:

  1. You have a no obligation face to face meeting. The adviser should outline how they work and give you a document detailing their services, how much they charge and how their fees are taken (i.e. do you pay them directly or is the money taken from your investment?). They'll also run through your financial situation, by completing a 'fact-find', and discuss how they can help you. At the end of the meeting the adviser will probably want to arrange a further meeting to present their advice.
    [The adviser's not being paid for this meeting, so their objective is probably to size up whether you'll be a profitable customer and, if so, convince you they're the right adviser for you. They'll also want to suss whether you're seeing other advisers and how quickly you plan to make a decision.]
  2. A second face to face meeting, where the adviser will present their advice and answer any questions you may have. If you're paying hourly fees, the clock is probably already ticking. If cpercentage fees, the adviser has probably yet to make any money, so will want to close the deal.
    [If the adviser has yet to earn any money, they risk earning nothing for the work they've put in if you walk away to 'think about it' (with their recommendations under your arm). They lose control of the situation. If you don't sign up at this meeting they'll want to arrange another to try and close the deal.]
  3. A third face to face meeting with a view to going ahead with the adviser's recommendations, if you haven't already. They might also have 'tweaked' their recommendations in light of any issues arising from the last meeting.
    [The adviser's last real opportunity to close the deal. If you don't proceed, all their time and work will have been in vain unless you agreed to pay for their recommendations.]

What ongoing service should I expect?

Most financial advice, especially investment-related, benefits from some ongoing monitoring and advice. If you pay your adviser annual fees (or they receive commission on historical business), they should really review your situation at least once a year, usually via a meeting, and contact you ad-hoc if an urgent matter needs discussing.

If this doesn't happen, you should take your annual fees and/or commission to another adviser who'll do a better job. Fortunately, this is quite straightforward. You just need to inform the underlying product providers that you wish to change the 'agency' to a new adviser. Any commissions will then pass to your new adviser, either to pay for their services or to refund to you.


The advice 'gap'

What happens when you need advice, but the adviser's fees are prohibitive?

This is a common occurrence on when investing smaller sums, such as regular amounts into an ISA or stakeholder pension. Fortunately, these products aren't that complex. With some groundwork (including the use of this website!) you should be able to make a reasonable decision yourself.


What can you do if it goes wrong?

If you lose money simply because the investment falls in value, then tough luck.

If you lose money due to dishonest or misleading advice, fraud or poor administration then you might have some comeback provided the adviser or investment is regulated by the Financial Conduct Authority.

If unhappy, your first step should be to set out your grievance in writing to the adviser or investment company concerned. Hopefully they will respond positively and help resolve the issue.

If, having done this, you are not happy with the firm's response you can take your complaint to the Financial Ombudsman Service (FOS). Their role is to review the complaint impartially and decide on a fair outcome. If the decision is in your favour then the offending firm must abide by that and pay any compensation detailed in the FOS decision (limited to £100,000 plus interest and costs). Firms generally dislike their customers taking a complaint to the FOS because they're usually charged a several hundred pounds handling fee per complaint, regardless of the outcome.

If the firm is unable to pay the compensation, perhaps because they've stopped trading, then you should contact the Financial Services Compensation Scheme (FSCS). The FSCS also applies if a firm goes bust and is unable to return investments or money to investors. Although the FSCS says it aims to process claims within six months, there's no guarantee it will do so. Don't expect to get your money in a hurry.

FSCS Maximum Levels of Compensation
Category Limit per Institution Notes
Deposits £85,000 per person 100% of the first £80,000.
Investments £50,000 per person 100% of the first £50,000.
Mortgages £50,000 per person 100% of the first £50,000.
Pensions/Life Insurance Unlimited 90% of the claim.
General Insurance Unlimited 90% of the claim, unless compulsory then 100%.
Source: Financial Services Compensation Scheme.

Financial advice jargon

Click below to display some of the more common financial advice jargon:

JargonMeaning
CommissionA payment made from a financial product provider to an adviser for selling their product.
Trail CommissionAn annual commission paid by financial product providers to advisers for selling their product.