The meaning of independent financial advice
Who's looking out for your money?
The burgeoning choice of financial products on the market - more than 30,000 (source IMA, DTI, AKG) at the last count – can be daunting and lead many people to leave their money languishing in the wrong place.
Yet when headlines present a bleak picture of our financial future if we don’t start saving more wisely for our retirement, right now, then it’s clear we should be doing more about putting our money through its paces.
Whether you’re looking for the best way to save for retirement, a mortgage, advice on how to invest for the future or protect yourself and your family with a life assurance policy, the most suitable product for you is almost certainly out there. It’s simply a case of how to find it.
Now, perhaps more than ever, it is important to get sound, unbiased advice on what financial products you should have, especially those of us who are too busy or who lack the confidence to search the market on our own. If you are wondering what sort of advice is out there, where and how to find it and how much it will all cost, read on.
Seeking advice?
There are currently three main ways of seeking financial advice for products such as life assurance, pensions and collective investments like unit trusts/OEICs, Individual Savings Accounts and Child Trust Funds; either through an independent financial adviser, a multi tied agent or a tied agent.
How do the types of advice differ?
Independent financial adviser
Offer unbiased financial advice to their clients and recommend the most suitable products, if any, after researching the whole market. The key differentiator is that they act on your behalf and will offer you the option of paying by a fee, as well as the option of paying by commission.
The big advantage of independent financial advice is that you have access to all the products on the market through a qualified practitioner (more about qualifications later). An IFA’s job is to research and recommend the most appropriate financial solutions after asking their clients a whole range of detailed questions about their circumstances, their financial goals and their attitudes to risk. IFAs are answerable to the FSA to ensure that they keep to the rules. As they act on your behalf, they provide personalised written reasons why they have recommended particular products or a course of action.
Tied Agents
Can advise only on the products of one provider.
Many people buy financial products through multi-tied agents or single tied, such as the sales staff who work at their bank or building society. When they want a pension or investment product, they often find it easier just to nip into their bank and accept what is sold through that organisation’s relationship with one or a few financial product providers.
The person providing you with product information (unless they are an IFA) are acting on behalf of the company they are employed by or have a tied relationship with. Many people buy products this way, usually because they feel more comfortable buying from a big-name organisation and assuming, sometimes incorrectly, that they are bound to get a good deal. What they are actually getting is limited information from a small selection of products. Confusingly, some banks also have an IFA available upon request!
The FSA has recently proposed changes to the current system under it Retail Distribution Review (RDR). We will therefore update this guide to reflect industry changes as and when they are introduced.
When to look for independent advice
Your first job, buying a house, getting married, starting a family, saving for your children and planning for retirement... these are just some of the big stages in your life that put additional pressures on your finances.
It makes sense to take control at each stage and revise your financial plans to match your changing lifestyle. If you are too busy to take the DIY approach, then an Independent Financial Adviser (IFA) can offer a helping hand through the maze of products and financial planning strategies.
An IFA can help clarify your financial priorities and your short, medium and long-term financial goals. They ask detailed questions about your financial circumstances, your existing investments, debts, state of health, your future goals, your risk tolerance and what you want from life. Then they will advise you on how to develop a budget and make recommendations that will help you manage your finances and allow your money to grow for the future while ensuring you and your family are financially protected.
An IFA can also take the pain out of the research required and pinpoint the most appropriate products to meet your aims, such as saving for your first home, your children’s future or your retirement needs.
How you pay for advice
Whether you take tied, multi-tied or independent advice, there will always be a cost for your adviser’s service. Customers pay for advice in three main ways.
- By paying the adviser a fee, either at an hourly rate or through a fee for the whole job. This is known as ‘fees only’ advice. Fees vary, typically from £50 to £200 an hour. Often the first half hour is free at the initial meeting where you can get to know each other.
- By paying indirectly through commission, which is deducted by the product provider from the products you may take out. Often there is not only commission charged for setting up a plan but also annual commission on top, known as trail commission.
- By paying a combination of fees and commission. The adviser will rebate back into the financial products or hand to you some or all of the commission or offset it against the fee.
Everyone can choose to pay their IFA by a fee rather than commission, if they want to. In the past the majority of consumers tended to opt for commission. In the future there may well be a shift towards more people paying fees and this will be explained in the information on your IFA’s charging arrangements. Most importantly only an IFA has to offer a choice of payment options i.e. paying by fee or commission or a combination of the two. Tied and multi-tied agents don’t have to offer you this choice, but some may.
The FSA has recently proposed changes to the current system under its Retail Distribution Review (RDR). We will therefore update these pages to reflect industry changes as and when they are introduced.
What you see is what you get
The Financial Services Authority (FSA) has recently made changes with regards to the documents you should receive when you visit an IFA. By incorporating the Markets in Financial Instruments Directive (MiFID), which came into effect on 1st November 2007, the FSA rules that an IFA has to provide you with the relevant information on charges and the services they can offer. This information may be provided to you in a Key Facts document, in the IFAs terms and conditions, or indeed in some other document.
All financial advisers must hand you this information up front for you to look at before going any further. Armed with these details you can ask your IFA to explain the charges he or she will make and choose to buy elsewhere if you think it may be better value. This system will also reveal where independent advice is better value than other types of advice.
Under its recent Retail Distribution Review (RDR), the FSA outlined proposals to change the way the financial advice market is structured. The RDR is currently in its consultation period and we will update this guide if there are any changes to the current situation.
So, does Independent Financial Advice look good to you?
Independent financial advice is considered the gold standard of financial advice, since it offers access to and guidance on a huge pool of products.
But before you go ahead, ask yourself the following questions.
- Would you want advice on the whole range of products available rather than on a limited number of financial products or provider companies?
- Do you want your adviser to be independent of any commercial relationships, which may restrict the advice they give?
- Do advanced qualifications matter to you, particularly in the sector you are seeking advice?
If the answer to any or all of these three questions is ‘yes’, then independent financial advice is likely to match your needs.