This article is by Paul Lewis and it is a very important reminder to us , not just of the need for financial advice, but to find good advice
How do I find a good financial adviser? It’s a question I am often asked. And there is no easy answer. Especially if you do not have a lot of money.
My first question is do you need financial advice? Unless you have a big lump-sum (tens of thousands of pounds or more) or a lot of surplus income to invest (hundreds of pounds a month) you probably don’t need financial advice and probably will not want to pay the fees good advisers charge. See free financial advice below for other services that can help you.
But if you do want regulated financial advice then here is my guide. Many people first want or need advice when they think about exercising their new pension freedoms. Some with a fund worth than £30,000 or more which comes with a guarantee have to take regulated financial advice before they can transfer their money out either to another pension or, ultimately, to cash.
I have three filters to sort the best advisers from the others.
Filter One – Independent
Only ever use an Independent Financial Adviser. This term is now regulated and policed not by UK regulators but by a body called the European Securities and Markets Authority or ESMA. And no I don’t know what will happen after the end of the transition period when we finally leave the ambit of the EU on 31 December 2020! I will be updating this blog when I do.
These EU rules – called MiFID II – began on 3 January 2018. There are two main sorts of financial advisers.
The sort you want is called ‘independent’. That can mean one of two things.
1. They give advice on all financial matters and looks across the whole of the market and give that advice on any financial topic where they might recommend a product.
2. they give advice on a specific type of product – such as annuities or pensions – and not on other types of product. But they must still look across the whole of the market relating to that product. This may be called ‘focused independent’ or may just be called ‘independent’.
Any adviser who is not independent does not look at the whole of the market and may be tied to one or more firms and can only recommend products from those firms. In the UK these advisers are called ‘restricted’ though hardly any of them used that term. Never ever use an adviser who is restricted by products. If you ask ‘do you offer independent financial advice’ and the answer is anything but a clear ‘yes’ then reject them. Many work for a bank or insurance company and of course only recommend you buy their products. That is just sales masquerading as advice.
A lot of advisers will be rejected by Filter One. The only way through it is to become independent.
Filter Two – Planners
Only ever use an IFA who is a chartered or certified financial planner. The very best qualified financial advisers are chartered (or certified) financial planners. This brings you down to the best qualified 6000 or so of the 33,000 regulated financial advisers. They are beyond what is called QCF Level 6. So they have put a lot of effort into being the good guys and the chances of a bad guy (or gal) remaining in there is small. Some firms are chartered which means that at least some of their advisers are chartered themselves and the rest are probably working towards it.
Lots of good advisers will be rejected by Filter Two. Sorry. Get the qualifications.
Filter Three – Payment
Only use a financial planner who you can pay in pounds. Never choose one who wants to charge you a percentage of your money. You earned, made, or inherited it. Charging a percentage is like taxing your wealth. Even HMRC is not entitled to do that.
Percentage fees are a hangover from the days of commission when advisers lived on a percentage of your money they took off year after year. If you cannot afford the fee in pounds you probably do not need or cannot afford financial advice.
You should also pay upfront from your non-invested resources rather than out of your invested money. One drawback of that approach is that a fee taken out of your pension fund comes from money which has already had income tax relief. So ultimately that fee costs you less than if you paid it out of your taxed income. It is all part of the massive taxpayer subsidies for the financial services industry (relief for finance and insurance from VAT costs £11 billion a year). That should be stopped of course, but at the moment it is an EU law. It is very unlikely to change after the UK finally leaves the ambit of the EU at the end of the transition period on 31 December 2020. If you must, then pay in tax-subsidised pounds from your pension fund. But ideally – and with all other investments – pay in pounds out of your non-invested resources. That way you see the money you are paying and can ask yourself – is it worth it? And never pay a percentage of your fund. Ever.
One iniquitous method of charging has grown up recently around pension transfers. If you have a good company pension that promises you a pension related to your salary – called Final Salary or sometimes Career Average schemes (they are branded Defined Benefit or DB schemes by the industry) you may be tempted to transfer it to a pension pot scheme – a money purchase or Defined Contribution (DC) scheme.
At the moment transferring out of a DB scheme into a DC scheme can seem very tempting because you will get a massive amount to move away from the guaranteed DB pension. It is usually a bad idea. Some financial advisers will consider this for you (you have to get advice if your pension is worth a transfer value of £30,000 or more) but will charge on a ‘contingent’ basis. That means you only pay them if you take their advice and transfer your fund. Normally this contingent fee will be a percentage of the total and often an ongoing annual percentage charge as well.
Always say no to such fees. They create a conflict of interest between you and the adviser who only gets paid if you transfer.
These three filters will take you a long way towards finding good, safe, but often expensive, financial advice. There may be adequate or even good, safe, and perhaps cheaper advisers which have been filtered out. They can get themselves through my three filters by becoming independent, getting financial planning qualifications, and changing the way they charge.
I must also add that there are a small number of well qualified independent financial advisers who have given dreadful advice (especially about pension transfers), have gone out of business, or have even turned out to be crooks. So these three filters are not a guarantee but they are a good start.
You can apply your three filters using online directories of financial advisers.
1. Adviser Book is the newest directory and my favourite. Unlike the others no-one pays to be included. It has the complete list of more than 12,000 FCA regulated adviser firms on it but it does not yet list individual advisers separately. It clearly states who is verified as independent and you can filter by qualifications and specialisms. You can also filter by independent and how fees are charged.
2. Unbiased was the first real attempt at a comprehensive database. It lists around 18,000 financial advisers. Most of them pay to be on the site – though some can have a basic listing free. Some pay more for a higher position in the listings. They can be identified by a pale blue background and the word ‘Ad beta’ in the top right corner. I would ignore all of those. The one below them may be better.
With care you can use the site to apply my three filters. There are other choices you can make such as specialisms or qualifications. You can even pick a male or a female adviser.
The entries for the advisers listed will show if the first meeting is free and what level of wealth they would like you to have.
3. Vouched For uses its algorithms to provide a list of advisers for you. They are ordered to take account of how local they are to you, reviews by customers, and ratings. Advisers cannot pay for a better position in the list. The site checks qualifications by asking for an image of the certificate.
You can filter by speciality and each entry shows clearly if the adviser is independent or restricted – always reject the latter of course. It will also show the minimum amount of money you need for them to take you on as a client.
Vouched For lists about 5000 financial advisers who choose to pay the fees to be included.
Other listings are available but they are much less useful. The Personal Finance Society lists all the advisers who have its qualifications and are Chartered Financial Planners, or are on the way to becoming Chartered, or work for a firm which is Chartered. That is a useful check. But it does not indicate if they are independent.
After using these sites and checking for independence, qualifications, and how they charge, you should then pick two or three you fancy.
I would only use an IFA who has a website where you can find out more. Ignore the slick sales patter which usually reads as though it is generated by a PR machine. You’ll find similar meaningless platitudes on most of them.
Most adviser websites do not tell you how much they charge – I would tend to pick only those that do. Certainly make that your first question when you meet them.
Most advisers will give you one free session. Go prepared with details and information about yourself. Try two or three and see which you prefer. Do not be embarrassed to say ‘no’ to them.
If you pick an adviser but later regret it you can leave by just writing them a letter telling them that they are no longer your adviser. Ask them to return any documents and destroy all your data. If you feel you have been badly advised or locked into investments you did not want, then complain and pursue the complaint to the Financial Ombudsman Service.
Free financial advice
If you want financial advice outside the regulated professionals, then try the free, Government approved Money Advice Service whose website is very good on a whole range of money issues, some of which many financial advisers will know little or nothing about. Or you may want to consider paying £1 for a month’s trial of the Which? Money Helpline. After that you will pay £10.75 a month for full Which? membership.
If you have pension questions then the Pensions Advisory Service offers an excellent website and a helpful helpline on 0300 123 1047. The service is free and approved by the Government.
Specific advice about the pension freedoms which began in April 2015 can be found at the Government’s Pension Wise website. If you are over 50 you can call 0300 330 1001 to book an appointment for one-to-one telephone advice, or a face-to-face interview at a nearby Citizen’s Advice office.
These three services are now part of Money and Pensions Service or MAPS. It used to be called the Single Financial Guidance Body and I really wanted it to be renamed the ‘I can’t believe it’s not advice’ Agency. But the Government decided against that. At some point the three separate services may be combined under the MAPS banner.
Only the term ‘independent financial advice’ is regulated. Anyone can call themselves a ‘financial adviser’, an ‘investment manager’, or a ‘property specialist’. And they do. Those terms are meaningless. If an adviser does not use the word ‘independent’ or does not say simply say ‘yes’ when you ask if they are independent, then they are not. Avoid them. Always ask for a FCA number and check it out on the Financial Services Register. Sadly – and madly – the register does not say if the adviser is independent or restricted. Sadly – and madly – again, changes to the Register mean that it is not as reliable as it was. A replacement way of checking people will not begin until 2021. But never trust someone who is not on it. And be cautious even about those who are.
If you are ever cold called or receive a text or email from an adviser you have not found and researched just say ‘no’. No-one ever lost money by doing that. Many have lost money by not doing that.