Investors and financial advisers: Friends or foes?

There is also professional advice. As an industry, financial advisers have never really covered themselves in glory. Historically, the advice sector operated in a fashion that makes you wonder how it was ever legally allowed, especially looking at how client interests were managed and how advisers were paid. But rules that came into force in 2013 have worked well in improving professional standards, charges and client outcomes. It may take some time for the negative perception of advisers to fade away, but for private investors it is worth remembering that there will always be something they simply cannot do themselves.

There are, of course varying stages, of personal finance, many of which private investors are more than capable of managing themselves. But seeking out professional help when you can’t is a logical step in achieving the best outcome for your assets. Yet, on average, private investors have a prickly relationship with professional advice. According to research conducted by London Institute of Banking & Finance and Seven Investment Management, almost 30 per cent of people believe advice costs too much, or that they do not have sufficient assets to warrant taking financial advice. Those aged over 50 say they would not use professional advice until they had amassed over £500,000 in assets. Such views show general naivety about the benefits of financial advice, and in which areas it can help save you money and therefore be a worthwhile investment.

For example, one area where advice can benefit is tax efficiency. Making sure your portfolio and your personal finances are tax efficient should be the first step of any investor, but often it is something only ever managed properly at retirement or when planning for inheritance. Doing it at these trigger points can often make it more difficult and more expensive than ensuring everything is tax efficient from day one. Advice on tax can often go beyond the simplicity of using individual savings accounts (Isas) and maxing out annual pension allowances, as tax exists in every aspect of life, and there could always be significant savings to be made, depending on how complex your investments and income sources are.

There are several tax allowances and limits to consider, which most investors will come across. This starts with the annual £20,000 Isa allowance and the £40,000 pensions allowance – which includes workplace pensions as well. But there is also the £4,000 annual tax-free dividend allowance, the annual £11,700 capital gains tax allowance (if selling outside of a tax-efficient wrapper). There is also the reduction in your annual pensions allowance should you earn over £150,000, known as the annual allowance taper, which further complicates matters. With so many moving parts, it takes an expert to be able to really drill down into your finances and find the right structure for you.

Rick Eling, an investment director at advice network Intrinsic, says private investors’ use of financial advice can be boiled down into four categories: tax planning, goal planning, risk planning and generational planning. Tax planning is an obvious win, he says, given a financial planner can help you understand your objectives and find the right tax structure. But the following three areas could add even more value.

“The most important thing about seeing a financial planner is to help you formalise why you are investing,” he says. “Investing involves risk, and if you have a specific event in mind and you need investment growth to reach that, then you need a risk. But only when you have created that goal, and made it specific and put a duration on it, can you work out your required return and required risk.”

This, he says, leads directly to risk planning. “If you are going to do investments yourself you could rely on a financial planner to work out how much risk you should be taking. A financial planner doing this well will look at your risk tolerance, risk capacity and investment objectives. They will gather information on all three of those and help you synthesise it into a level of risk that is right for you. You could then go and self-execute at that level of risk.”

The final space, generational planning, is vital in making sure investors make full use of trust structures, gifting and charitable donations to reduce the inheritance tax (IHT) liability faced by their heirs. Inheritance tax is possibly the most complex faced by individuals, with the government’s own tax body admitting it was overly complex. Professional help here could be hugely beneficial.

Dennis Hall, chief executive of advice firm Yellow Tail Financial Planning, agrees with the areas where private investors seek professional advice, but offers a slightly different way of looking at it.

“It’s all about periods of transition,” he says. This could mean preparation for starting a family, becoming self-employed, retirement and even less joyous occasions such as divorce, where pensions are often a sticking point.

“For retirement, private investors may have the investment strategy covered, but some of the strategy around safe and sustainable withdrawal rates, or drawing down assets tax efficiently and deciding whether to do things via a lump sum or a phased retirement, is where planners can help.”

He adds: “Also if you’re ever thinking of transferring out of a pension scheme or consolidating your various tax wrappers such as Isas and pensions is another time you may want to speak to somebody – as well as thinking about inheritance tax planning.”

How the sector works

While understanding when one might need a financial adviser is the first step, private investors overcoming the second, finding an adviser, could be more taxing. The reputation of financial advisers has never been great among the wider population, with distrust of almost all financial services high in any survey that has cared to look. Historic levels of distrust stem from perceptions of overly high fees – where they were charged – or advisers making decisions based on commission from asset managers and insurers rather than what was best for the clients.

The city watchdog, the Financial Conduct Authority (FCA), has attempted to tackle many of these issues, and these days, from a client interest perspective, the sector is in a much better place. Advice firms have generally become bigger, or are part of a larger network, and have compliance and regulatory rules at the core of what they do. Many advisers will believe this is overzealous on the part of the FCA, but the rules have been designed with client interests at heart. This does not mean they do not have unintended consequences, but engaging with the sector is generally more professional and safer than a decade earlier.

Before engaging with an adviser, it is important to understand how the industry works. For example, while a financial adviser could be a local small business, it could also be part of a wider and national network of financial advice firms. A network means that a much larger advice business has an interest in the smaller advice firm, and provides it with compliance, regulatory and often IT support. Networks allow smaller and more local advice businesses to deal with the increasing amounts of regulation and compliance work and other areas such as the new general data protection regulations (GDPR).

If an advice firm is part of a network it will be known as an appointed representative, which means the network owner, or larger advice firm, takes on the responsibility of making sure the advice firm follows all regulations. The network is the one that has registered itself with the FCA and the advice firm represents that network. This model is supposed to better protect clients, especially with legal recourse should they ever be misadvised – with the network taking on legal responsibility for any fault of an adviser. However, recent legal cases have yielded mixed results, with some networks successfully arguing away responsibility.

An advice firm can also be directly authorised by the FCA and therefore takes on the responsibility for following all the rules itself. However, if a firm does this it is worth asking how it manages its compliance and data security. Often smaller companies will use larger ones for support, but remain out of a network, and making sure you know how they are regulated, how they comply and how they protect your data is important.

There are also two different types of advisers investors must decide between – independent and restricted. This is generally more important if you’re expecting your adviser to start selecting financial products, but can still be relevant even if only engaging with them on ad hoc projects such as tax and retirement.

An independent financial adviser (IFA) should look at the whole of the financial services market and make decisions based on a full analysis of you and the market.

A 'restricted' adviser can mean different things. The restriction can mean they only provide advice on one topic, such as pensions, or only provide advice on one specific product. However, it can also mean that the adviser covers all areas of financial advice but can only recommend products from specific providers – meaning they are not looking at the whole of the market.

Some financial advisers will also be specialists in their field – and have taken additional qualifications in topics such as tax planning or investments. If this is what you are looking for, then looking for a specialist, whether independent or restricted, may be appropriate.

FTAdviser's Top 10 Financial Advisers

Source: FTAdviser, Strategic Insight

For FTAdviser's full Top 100 table, click here.

Picking an adviser

Finding the right financial adviser for you should not be as difficult as you might think, but there are also no prescriptive ways in which one can choose. At best, the guidance is always as soft as finding the person that best suits what you need, based on your assessment. Mr Hall says it should be someone who demonstrates they have the knowledge you need – either through conversation or qualification – and someone who can clearly explain what it is you need, and what they will do. You should also be happy with how they will communicate with you, either in person, or phone and e-mail.

“You want to find someone whose language and approach you are comfortable dealing with,” he says. “Find three people and go for a short meeting just to see if you can work with them and understand what they’re talking about.

“Ask yourself how easy it is to talk to them, get in touch with them, are they trying to make it more complicated than it needs to be or can you follow them? Do you think they are not being straight and clear? You don’t need to do more than that, otherwise it just gets complicated.

“If you get the sense someone is being evasive, or cannot explain how they charge, or cannot explain the structure and process that they take people through, it could be a bit of a mish mash.”

Value for money

When it comes to the types of specific advice mentioned it is more likely advice will be ad hoc rather than ongoing, making the expected fee level difficult to determine. There are two ways a private investor with no ongoing relationship will be charged, an hourly rate like the solicitor model or a fixed fee. This could either be for the adviser to provide a report advising you on next steps, for example in tax planning or IHT planning, or even to then go forth and implement a new structure for your assets. On average, hourly-rate fees can vary between £50 and £250, depending on the type of advice and expertise of the adviser, and the complexity of your problem.

Mr Eling’s firm, Intrinsic, is part of a 2,000-strong network, and even in this case he says most of the firms will have their own fee model and own way of engaging with clients.

“There aren’t many firms that just do tax advice, but if they did it would be on a fee basis. The client would ask a specific question, the adviser would prepare a report and there would be an hourly or fixed fee for consultation,” he says.

Mr Hall says: “Not everyone is keen on the hourly rate. So you should try to agree a fee – which may or may not be based on a percentage of the assets under consideration. Find an adviser that has a fee structure that is fair or reasonable. No matter how it’s taken, it has to be value for money.”

Value for money is difficult to define in almost all aspects of life, never mind something as niche as financial advice. However, speaking to several advisers should help give you an idea if any fees are outliers or expensive. You should also be prepared to pay for specialism – if someone has demonstrated superior knowledge and has made you feel comfortable, that is worth something. Do not necessarily be put off by a higher fee. Taking advice in this way should have a demonstrable outcome, ie better tax efficiency or a plan for your portfolio – so ensuring the advice is worth the reward should be easy in determining whether it is worth it.

Mr Hall has some more advice: “Always be prepared to pay non-contingent fees,” he says. “There are some firms that simply want to put you into products that they control, so be prepared to pay for what it is you want at the outset, if you want a job well done.”