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How to find a financial adviser

Created:
8 May 2008
Written by:
Moira O'Neill

As a reader of INVESTORS CHRONICLE, you're probably reasonably confident about investing. But do you know about tax, pensions or insurance? This is where a good financial adviser can offer essential expertise. But finding quality advice is not always easy.

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There are many sources of advice. 'Financial adviser' is a broad description covering banking personnel, high-street brokers, professional wealth managers and specialist advisers (for example mortgage brokers).

A 'tied adviser' is what you would expect to find in a bank or building society. They can only offer products from a single company so they rarely offer best value. In some cases, they may not even have a suitable product type in their range, which means they cannot provide any advice at all.

Multi-tied advisers are a slightly better option, as they can advise on a range of products. In fact, many bank and building society staff are now multi-tied as deals have been struck with partner insurance companies and fund managers, so they have a broader product range to sell. But this is still not an entirely satisfactory source of advice. Multi-tied advisers will argue that their panels of product providers are created by a robust selection process, but in reality entry to the panel is a purely commercial arrangement. Because the financial market changes so quickly, the best providers when the panel is created may not be top of the league tables a few months later.

Independent advice

'Independent' financial advice is the badge of quality to look for - but even this does not sort the true professionals from the less knowledgeable.

The bare minimum qualification an independent financial adviser (IFA) needs by law to give financial advice is the Certificate in Financial Planning, a qualification offered by the Chartered Insurance Institute. This used to be called the Financial Planning Certificate and is equivalent to an A-level or perhaps a challenging GCSE. However, many areas of financial advice can be complicated and require a higher level of knowledge. More specialist professional qualifications - equivalent to a university degree - are on offer for complicated areas such as pensions, tax planning, trusts and specialist investment.

Higher qualifications are not everything - experience can count for more - but they are certainly desirable. If your adviser only has the basic certificate, you should perhaps question their commitment to professional development.

If you want someone with higher qualifications, good benchmarks are the Diploma in Financial Planning or Advanced Diploma in Financial Planning.

However, the twin peaks of professional qualifications for a financial adviser are the Chartered Financial Planner status and the Certified Financial Planner licence.

'Chartered Financial Planner' is a title awarded by the Chartered Insurance Institute to experienced financial advisers who have a level of qualification equivalent to a first degree. The adviser must have worked in the industry for at least five years, and have at least six advanced level units, or the equivalent.

'Certified Financial Planner' is a similarly high-level qualification awarded by the Institute of Financial Planning, but is more about the practical application of technical knowledge.

Finding an adviser

The best way to find a financial adviser is to get a recommendation from a trusted friend or relative. Or you could ask your accountant or solicitor - they should know the best advisers in your local area. Failing that, you can use one of the find-an-IFA services listed at the end of this article.

The final decision will come down to chemistry. Do you trust the adviser with your personal details and the comfortable financial future of not only yourself but your dependants? It is very important to have an initial meeting to see if you get on with the adviser.

It's a good idea to contact at least three advisers before selecting one. Compare the services they offer and how much you are likely to be charged for the work. Most IFA firms will have a 'menu' they can show you which compares their services and costs with an 'average' firm.

How you pay for advice is also very important. Anyone operating as an 'independent' financial adviser (IFA) has to offer you the option of paying a fee. You can also pay by commission on the products sold or a mixture of both.

If you have substantial assets or elaborate advice needs you should use one of the small but growing band of professional, fee-based advisers, who take no commission but get paid directly by you for the ongoing advice and wealth management services they provide.

The big advantage of fees is that it makes it far more likely that the adviser will act with your interest at heart. Fees are the only way to ensure complete impartiality - they mean the adviser will not be tempted to recommend a product just because it pays him the biggest commission.

Keep in mind that commission-paying products are not the solution to all financial problems. A recommendation to pay off your mortgage does not earn a financial adviser a commission, nor do products such as premium bonds and index-linked savings certificates from National Savings & Investments. Note also that investment trusts don't pay commission to financial advisers.

And finally, always check the credentials of your financial adviser (new or existing) against the Financial Services Authority (FSA) register at www.fsa.gov.uk/register. Never take financial advice from someone who is not authorised and regulated by the FSA. If you do, it leaves you with no legal protection or recourse to compensation if the advice is wrong or bad.

FINANCIAL ADVICE: Past, present and future

THE PAST: Polarisation rules came into effect in 1988. Under these rules, advisers on life assurance, personal pension policies, collective investment schemes (unit trusts and open-ended investment companies) and investment trust savings schemes had to be either independent (an IFA) and advise across all products and companies on the market or tied and represent just one company and sell only its products. The clear differentiation between tied and independent advisers survived until the end of 2004.

THE PRESENT: The polarisation rule was abolished in June 2005 and two more categories of financial adviser were introduced - multi-tied and 'whole of market'.

Multi-tied advisers can advise on products from several companies.

A whole-of-market financial adviser is similar to an independent financial adviser but they do not offer the option to pay for their services with a fee, so they must rely on commission from product providers for remuneration. This can create a bias towards a product recommendation when another solution may be more appropriate. Advisers wanting to call themselves independent have to offer clients the option of paying by a fee.

THE FUTURE: The Financial Services Authority is conducting a retail distribution review. Last week, it published an interim report setting out its thinking following a six-month consultation period. The FSA's paper includes proposals for a three tier advice market:

1. A new-look, single-tier professional advice sector with higher standards than today, built on advisers acting in the long-term interests of their clients:

• To be called an adviser, the advice offered must be 'whole of market'.

• The remuneration model must be determined without input from providers, but adviser costs payable through the product are permitted.

• Qualification levels need to increase, but to a level more aligned with Diploma than Chartered status.

• The tied and multi tied community will not be able to operate as financial advisers, or be allowed to infer to consumers that they are offering advice.

2. A sales regime:

• This will be strictly 'non-advised' consisting of guided sales and execution-only and can operate within the current regulatory framework.

• The FSA will only change regulations to introduce a new sales regime if the industry makes a strong enough case for it.

3. A third tier of money guidance to sit outside of the regulatory regime:

• Designed for consumers who are currently alienated from the industry, it will provide basic guidance on financial matters.

• No product sales or recommendations will be permitted.

• It will effectively act as a triage service, pointing consumers in the direction of sales, advice or self-execution.

The FSA desire to clearly delineate 'advice' and 'sales' must be seen as a victory for parts of the intermediary community who are determined to offer real advice for their clients. However, there is a feeling that the FSA has decided that a polarised distribution regime really is the best way of ensuring consumers understand the difference between sales and advice. It seems to be a case of going back to the future.

THREE TOUGH QUESTIONS TO ASK AN IFA

What is your investment advice process?

If the answer consists solely of the selection of investment funds then walk away. A true investment professional will describe a process that includes detailed risk profiling (not asking you for your attitude to risk on a scale of one to 10), asset allocation using mathematical models and benchmarking to measure relative performance.

Can you explain the difference between alpha and beta?

These are terms used in the quantitative evaluation of investment portfolios and understanding them is crucial to structuring a portfolio appropriately and selecting investments. Answering this confidently will be a sign of a high-quality IFA.

What ongoing service(s) will I receive?

Find out how you will work together in the future (not just today). Will they get in touch with you when something important is happening with your financial plans or will you be expected to contact them?

FIND-AN-IFA SERVICES

• IFA Promotion (www.unbiased.co.uk, T: 0800 085 3250) can provide the names and addresses of four IFAs in your area. You can search by qualifications and specialist area of advice.

• The Institute of Financial Planning (www.financialplanning.org.uk, T: 0117 945 2470) has a national register of fee-based financial planners.

• The Personal Finance Society (www.findanadviser.org, T: 020 8530 0852) can help you search for a Chartered Financial Planner.

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