Do you really need to pay for financial advice?

The way you pay for financial advice will change dramatically from January, with many firms charging an upfront fee rather than taking commission from your investment. Danny Cox (right), from financial advisers Hargreaves Lansdown, questions whether you need advice at all. As he explains below, more DIY services are cropping up which don't give advice — they just process your investment request, for a lower fee.

Financial advice is changing, for the better. To address the problems of past mis-selling, from 1 January 2013 tighter rules and higher standards will improve the quality of financial advice given.

At the same time, many firms are launching DIY investment services without financial advice, giving savers and investors significantly more choice of how, and whether, to take advice.

This begs the question: why pay for advice when you can find all the information you need online?

According to a recent JP Morgan report, just 13% of respondents intend to use a financial adviser for all their planning. The remaining 87% will use DIY financial advice for all or part of their needs, which, for the vast majority, will reduce the cost of investing.

Why are so many turning their back on financial advisers?

When people ask for advice, in most cases they are asking for sufficient information to help them make a decision.

Lack of knowledge is a key driver when seeking the help of a professional. Two decades ago, it was virtually impossible to either conduct the necessary research or source financial products yourself.

Whether you were choosing your first mortgage or starting to save into a pension, you had little choice but to use, and pay for, an adviser.

More information

Fast forward to the present and there is a vast amount of free information available at your fingertips. Online tools and calculators can help you plan and specialist firms offer easy ways to buy products.

This allows you to make the majority of financial decisions yourself, without the need to pay a financial adviser. Essentially, you are now in a position where you should only pay for advice you need and value.

But when might you need advice? Those who seek advice do so for one or more of the following reasons:

• Lack of knowledge and/or experience. An adviser's technical know-how, experience of products and providers, application of tax law or practice, and network of specialists are worth paying for in the right situations.

• A lack of confidence. Fear of making the wrong decision can lead to inertia and a lack of action. This is particularly true in complex areas such as pensions and tax, where indecision can prove as costly as doing the wrong thing.

• Some people simply do not have the time to do the necessary research themselves.

• There are some aspects of financial planning where advice is effectively compulsory, such as certain pension transfers and some discretionary investment management services.

Financial Services Authority (FSA) authorised advisers are subject to ongoing testing and scrutiny. If an adviser recommends an investment which is not suitable, you have the right to redress and compensation.

DIY risks

On the other hand, when you make your own investment decisions and use services to execute your instructions (known as "execution-only" or DIY advice) you accept responsibility for ensuring the investment is suitable for you.

You can use various sources of information and guidance to assist you but the choice of investment and whether to buy, sell or hold is yours and yours alone. You save the cost of the advice but have no right to redress if the investment isn't right for you.

Good advice at the right time is well worth paying for. When considering advice, you should do as much research as you can beforehand.

You never know, you may find the answers you need and save those advice fees. But if you do still require advice, the research you have done will help you to understand the advice given and its value.

Views expressed do not necessarily represent those of MoneySavingExpert.com.