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.

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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.

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Types of financial advice

There are three types of adviser:

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 tied 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 tied or multi-tied adviser.

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How much does it cost?

Financial advisers earn their living from giving advice, so you should expect to pay for it. There's normally two routes, commission and fees. IFAs must offer a fee option, although many offer the commission route too.

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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.

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Discount brokers

If you're happy making your own financial decisions there's one small problem, many financial product providers don't reduce their charges for customers buying direct, i.e. you'd pay the same whether you buy direct or through an adviser (even though the adviser might receive commission). This is where discount brokers come in.

Discount brokers don't (normally) give advice, but will transact the purchase for you then share the commission they receive from the product provider. A few will even refund all the commission they receive and simply charge a flat 'admin' fee instead - potentially even better value.

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, while a few offer the chance to speak to an adviser (if you're investing enough) and get some sort of assistance with your decision.

Potential Discount Broker Savings on a Unit Trust over 10 Years
Assumes: £10,000 initial investment, standard initial charge 3%, annual charge of 1.5%, annual return before charges 6%, annual commission 0.5%, all discount brokers waive initial commission to remove initial charge.
Purchased From	Initial Charge	Annual Charge	Estimated Final Value	Difference vs IFA
IFA	3%	1.50%	£15,064	£0
Discount Broker (no annual rebate)	0%	1.50%	£15,530	£466
Discount Broker (50% annual rebate)	0%	1.25%*	£15,905	£841
Discount Broker (full annual rebate)**	0%	1.00%*	£16,124	£1,060
Figures assume a fixed annual return, in practice it may vary. * estimated equivalent annual charge including annual commission rebate. ** assumes a £20 initial fee then a £10 annual fee.

To find out how much you might save on a particular product, look out for the discount broker entry in the 'ways to buy' section featured on relevant pages on this site.

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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. You could also take a look at our user's experiences and views in the reviews section.

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.

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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 and how they're paid. They'll also run through your financial situation, by completing a 'fact-find', and discuss how they can help you. If you have the option, you'll need to consider whether to opt for fees or commission. 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 commission or percentage fees, the adviser has 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.]

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What ongoing service should I expect?

Most financial advice, especially investment-related, benefits from some ongoing monitoring and advice. If your adviser receives annual commission and/or fees, 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 commission and/or fees 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.

If you've opted for the commission route, this is where using an adviser who takes some annual commission, rather than everything upfront, is especially beneficial. The ongoing annual commission provides a carrot for another adviser to look after you without charging a fee. If not, you'll have to pay the new adviser a fee and the original adviser (despite not providing satisfactory ongoing service) is sitting pretty with a fat commission cheque in their pocket.

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The advice 'gap'

What happens when you need advice, but an adviser doesn't receive enough commission to make it worth their while to help you, or their fees would be prohibitive?

This is a common occurrence on low value products that pay little, if any commission, e.g. stakeholder pensions and child trust funds. 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.

The FSA also provides decision trees for stakeholder pensions and lists sources of free information.

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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 Services 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.

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The future - Retail Distribution Review

Realising that the financial advice industry needs a pretty major clean up, the FSA launched a Retail Distribution Review in June 2006. The consultation and resulting changes are due to complete by the end of 2012.

The FSA seems to have three clear aims (in their own words):

• Improve the clarity for consumers of the characteristics of different service types and the distinctions between them.
• Raise professional standards.
• Reduce the conflicts of interest inherent in remuneration practices and improve transparency of the cost of all advisory services.

What they're basically saying is that they want to make it easier for you to understand the type of advice you're getting ensure advisers are better qualified and reduce the risk of mis-selling due to commissions.

Of the various announcements made to date, perhaps the most significant is that by the end of 2012 any commission payments from providers to advisers must be taken directly from product being sold, i.e. if a pension pays £1,000 commission then £1,000 will be deducted from the pension. This should effectively turn commission into a transparent fee.

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Financial advice jargon

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

© Candid Money Limited 2012
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