A new name has been added to the roll-call of the nation’s most detested occupations in recent years.
Alongside politicians, traffic wardens and, of course, journalists, financial advisers now have a hard-earned place on our metaphorical dartboard.
Thanks to a series of scandals, from pension mis-selling to the endowment mortgages debacle, advisers have experienced a rapid and decisive fall from grace.
But does that mean anyone with their head screwed on should avoid ‘rip-off’ advisers like the plague? Unfortunately, life is not that kind.
Thankfully, there is one type of adviser we can consign to the dustbin of history. These are known as tied advisers, and they generally only sell the products of the bank, building society or insurance company that employs them.
Do not be fooled by the fact that they might, in addition, sell a tiny handful of products from other companies they have agency agreements with.
There are more than 130 mortgage lenders out there. These people will sell you the products of one company only. Their very existence is pointless.
Instead, there is a separate breed of advisers, known as independent financial advisers (IFAs).
To avoid using, or even becoming, a bad IFA there are certain points to bear in mind.
Most IFAs conduct most of their business via commission. In other words, for every investment, insurance and mortgage they sell, they will receive a nice little backhander from the product provider.
This creates two potential problems. Firstly, IFAs can be tempted to sell you the product that earns them the most commission – irrespective of whether that is the best deal.
Secondly, they can even be tempted to flog you something when you shouldn’t be buying anything at all.
For instance, if you have a bit of spare cash, the most efficient use for it may be to repay a slice of your mortgage.
A commission-based IFA may spend an hour of his or her time with you, and not receive a penny for giving you this advice. The temptation to sell you an investment instead, earning the adviser an up-front commission, and extra ‘trail’ commission for every year you keep your money invested, cannot be dismissed.
Instead, if you can afford to pay an upfront fee to see an IFA, you should.
Paying an hourly fee, as one would with a lawyer, or of course an accountant, removes the incentive for bias – something to bear in mind if you’re an accountant considering becoming an IFA.
Fees may range from £80 to £200 an hour – but, in reality, that is still cheaper than the commission route, as well as resulting in better advice.
This is because a fee-based adviser will ‘rebate’ their commission to you.
In the case of the above investment, both the upfront and trail commission will be added to the amount you are investing. This will soon outweigh the fee you have paid.
IFAs are surprisingly useful, even in this information age when it is easier than ever to research the market yourself, then buy straight from a bank, insurer or investment house.
First of all, good IFAs will provide a ‘holistic’ approach. For example, you could easily buy a personal pension straight from the provider.
An IFA will also arrange this for you. But first he or she should first conduct a comprehensive ‘fact-find’ of your circumstances.
This may reveal that putting all your eggs in a pension basket, and tying it up until the age of 50, may not be your best move. Perhaps taking out life insurance or critical illness cover instead may be wise. Or instead, putting your money in a more flexible individual savings account (ISA) could be an option.
Very few people are qualified to examine their overall financial position and decide for themselves the critical areas to strengthen. A good IFA, and they do exist, can.
Secondly, even if you know you want that Legal & General ISA – buy it through an IFA. Most investment houses will charge an initial fee of four to five per cent on a stocks and shares ISA.
Go to a ‘discount’ execution-only IFA (ie where you are not paying for advice) and you will save money. A discount IFA will rebate the bulk of those charges back to you, only keeping one and a half per cent or so to cover their costs.
But how do you find a good IFA? If friends or relatives can recommend an adviser they are comfortable with, that is a good start.
If not, you will need to visit two or three and conduct your own research.
Ask to see testimonials from satisfied clients – an absence of which should ring alarm bells.
Ask for the adviser’s qualifications. To set up in business, an adviser merely needs a financial planning certificate – akin to an A Level.
Better quality advisers will also have passed an advanced FPC – a real professional qualification.
But equally important, a good IFA should be someone who can handle your financial affairs for years to come. Therefore, you need to feel comfortable and relaxed with your adviser. If they grow to like you, they will even be less inclined to rip you off.
USEFUL CONTACTS IN THE INDUSTRY
– IFA Promotion – Its website (www.unbiased.co.uk) lists 9,000 IFAs and allows you to search by postcode and preferred payment method. There is also a phone hotline number: 0117 971 1177.
– Society of Financial Advisers (SOFA) -A professional body. Its website (www.sofa.org/html/consumer/adviser/search.asp) lists 1,000 IFAs who have passed AFPC exams and agreed to abide by a code of conduct.
– Financial Services Authority – The sector regulator. Its website (www.fsa.gov.uk/consumer/best_deal/index.html) lists useful tips for dealing with advisers.
– Ethical Investment Research Service – If you want an IFA who will help you invest ‘ethically’ visit its website (www.eiris.u-net.com) or call 0845 606 0324.
– FTYourMoney.com has a ‘finding an adviser’ section as well as access to the IFA Promotion and SOFA search engines.
– English ICA website – go to www.icaewfirms.co.uk/database/ssspecsearch.asp.
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