So you've decided you need financial advice from an Independent Financial Adviser (IFA). Sadly, it isn't that easy. How do you judge someone's expertise on a subject you know nothing about, and how much does it cost?
HAVE YOU ALREADY READ PART I?
Do you need an Independent Financial Adviser?
What should an IFA cost, and how to pay for it?
For years, IFAs have been paid in one of two ways - either by fees (you pay upfront) or commission (it takes an ongoing cut, which can vary per product). By law, IFAs have been required to give you the option of either.
But since 31st December 2012, IFAs have been banned from accepting commission from providers on investment products. Instead, they must work on a fee basis that they agree with you.
This can either be an upfront fee, or it can be a commission-type fee, which pays them from the money you pay for the policy, and - if you agree - will continue to pay them.
They can still accept commission from providers for life, critical illness and income protection insurance policies, and mortgage broking.
Here are the main differences between the ways of paying.
Fees. Here you pay a flat fee for their advice, often based on how many hours of their time you take up. Standard fees range from £75 to £250 per hour, depending on whereabouts in the UK they are based, and what kind of advice you need. Ask upfront what this cost will be, so you can compare different IFAs.
You can also agree commission-type fees with your IFA if you don't want to pay an upfront fee. This type of fee will give them some money from the cash you pay for the product once you take it out, and may also pay them in subsequent months or years. But, vitally, you are in control of the type of fee you pay.
With fees-based advice, there's less incentive for advisers to skew their advice according to how much they'll earn from doing so, as there will be no commission. Large investments will particularly benefit from fee-based advice, as these are usually flat and don't increase with the size of the investment.
Commission. Here, advisers take a cut every month that the product is held. For example, the typical commission paid on a £30 a month level term life assurance policy for 25 years would be £600.
This may seem free to the consumer, but your money still pays them, just over a longer period instead of upfront - and it often adds up to a much higher cost.
Product providers use this to their advantage, offering improved commission to IFAs for certain products, hoping for more frequent recommendations.
However the commission route still has its merits. While there will be some bias, the legal obligation to give good advice means advisers tend to tweak at the fringes rather than give downright poor information. And the big advantage is that as you won't need to stump up the cash each time, you'll be less scared to seek help when needed.
Locating an IFA near you
The first thing to do is speak to friends and family about their experiences with local IFAs. However, again, always double-check the adviser really is independent. If not, don't go there.
One alternative is to use Unbiased.co.uk, which has a network of 15,000 IFAs. Just enter your postcode and it will indicate your local IFAs. It also now allows you to search by IFA speciality or qualifications, so you can find the best person for you. Unbiased.co.uk do a weekly check to verify all advisers are registered with the regulator, the Financial Conduct Authority.
Or you can also look at a new site - VouchedFor - which hosts reviews of IFAs, and checks them to make sure they're from genuine clients.
Or try Find An Adviser with a network of 7,000 IFAs. Be careful, though, because this doesn't just list IFAs; check they're independent first. Start by going to three and seeing who you get on well with, as this is an important consideration.
Get a little knowledge before you get advice
While personal recommendations and a good bedside manner are useful, always treat them with a pinch of salt. A personable IFA isn't necessarily giving you good info.
Sadly it's a catch-22 situation: you need to know your subject to know that the IFA's talking rubbish, but the reason you're going to an IFA in the first place is because you don't understand the subject!
Try doing a little research first. If you want to know about various products, read around this site - there's Life Insurance, Mortgage Broking, Pensions and Annuities to get you started. These guides don't replace financial advice, but if you've read them, you're better placed to spot if the IFA's talking rubbish.
An IFA-picking checklist
While it's not foolproof, the best way to ensure decent advice is to establish credentials and qualifications. This may not find you the best IFA, but it should help weed out the worst.
Top questions to ask
Are you independent or restricted?
These are technical terms, and are absolutely vital. An "independent" financial adviser will be able to search the whole of the market to get the best investment for you, and must be entirely unbiased to call him/herself independent.
Since 31 December 2012, advisers who are not able to search the whole market, or are tied to certain providers must class themselves as "restricted" advisers.
If you find a restricted adviser, check what their restriction is. Some are called restricted because they have, for example, chosen to specialise in certain investment areas or not to offer others.
However, other restricted advisers are tied to certain providers and will only be able to offer you investments or insurance from those providers, or none at all if there are no products he or she can advise on that match what you want, so always check if the adviser you are consulting meets your needs. If in doubt, always, always seek an IFA.
How long have you been established?
Look for an IFA business that's been established for at least three years.
Are you authorised?
The Financial Conduct Authority monitors firms to check they are qualified and above board. Before you meet any IFA, do a quick search on the FCA's website to check they're fully authorised.
What qualifications do you have?
The Financial Conduct Authority requires all IFAs to pass Level 4 qualifications - so you should be looking for a Diploma level certificate, such as the Diploma in Financial Planning (DipFP) (formerly the Advanced Financial Planning Certificate), or even better, the Advanced Diploma in Financial Planning (ADFP)
To get these, the IFA has to sit advanced exams. They can choose which subjects to specialise in, such as pensions and investment, though the taxation qualification is compulsory.
The adviser also needs have to have an annual Statement of Professional Standing (SPS), issued by an FCA-accredited body. This will attest to their qualifications and their accreditation on the FCA's register. This should be displayed in their office - if not, ask to see it.
The top qualifications IFAs can get is Certified Financial Planner or Chartered Financial Planner, which put them up there with accountants. For a full list of IFA qualifications, go to Unbiased.co.uk - your adviser must hold at least a Level 4 qualification.
Tips for when you meet your IFA
When you go to meet your IFA, either for the consultation or just to get a look at the whites of their eyes, there are a few important steps to make sure you get the right service.
Always ask, 'how much do you charge?'
Find out exactly how much you'll be charged. Check if you're paying by the hour, and whether the price includes VAT.
Don't be afraid to haggle
There's always room to haggle. Especially if you're seeing a number of IFAs, pick the one you like and see if they'll match another's cheaper price. Always at least try to ask for a reduction in fees or a rebate on commission (if they're advising on insurance or mortgages).
Before you go, fill out a fact find
Advisers must collect information about you so they can properly assess your situation; this is called a 'fact find'. Ask it to send you the fact find to fill out beforehand.
Fill as much in as you can (and get documents together for the rest) and then send it back to them. This way, they can get familiar with your situation beforehand and not waste time just collecting the info while the fee clock is ticking.
Get it in writing
Be sure to get their recommendations in writing, then sit down with a nice cuppa and have a good read through. And if you don't understand, ask!
Finally, even if you do go through an adviser, remember you're in charge. The decision is yours alone, and you don't have to do what they tell you. Read around their advice and ensure it's really right for you.
What to do if advisers mis-advise
If you feel you've been mis-advised, you need to collect as much paperwork as you can find, then write to the firm that sold you the product. If you're still not satisfied with the firm's response, you have the right to take your complaint to the Financial Ombudsman Service, who can award compensation.
For full details on how to claim, visit the Financial Ombudsman Service website.
Remember, when it comes to investment, 'low risk' isn't the same as 'no risk'. You can still lose your money. Provided the adviser has explained this, there are no grounds for complaint.
However, if they told you that you couldn't lose money, then you were mis-advised. In a nutshell, for investments you're complaining about the way you were sold, not the performance of a product.