Thursday, 5 August 2021

FIND GOOD FINANCIAL 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 under EU rules called MIFID II which began on 3 January 2018. Now that the transition period is over and the UK has left the ambit of the EU these rules have become part of UK law and the Financial Conduct Authority polices them.

Under these rules 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
My general position is only use a financial planner who you can pay in pounds. Do not 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 were paid year after year. If you cannot afford the fee in pounds then you probably do not need or cannot afford financial advice. 

However, in some very limited circumstances a small percentage charge - say 0.5% or so - can be better value than paying in pounds. But always make sure that:
  • you know each year how much has been taken from you so you can see if it is value for money.
  • you review the service you get every year and if it is poor, find another adviser.
Ideally 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 from VAT for finance and insurance costs £11 billion a year). That was originally an EU law but is very unlikely to change once we have finally left the EU in 2021. 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 unless it is good value and you know what it is and what you get for it never pay a wealth tax to the adviser from your fund. 

Contingent fees
One iniquitous method of charging grew up 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.

Transferring out of a DB scheme into a DC scheme can seem very tempting because you will get a massive amount of money to move away from the guaranteed DB pension. And then if you choose to do so you can cash some or all of that pension in. It is almost always a bad idea. In the past some financial advisers who would deal with this for you (you have to get advice if your pension is worth a transfer value of £30,000 or more) charged on a 'contingent' basis. That meant you only paid them if you took their advice and transfered your fund. Such fees created a conflict of interest between you and the adviser who was only paid if you transfered. The FCA finally saw sense and banned contingent fees from 1 October 2020. 

The difficulties of advising people about pension transfers and the cost of insurance mean that relatively few advisers will handle this business. Esepcially if you do not have a very valuable pension. 

Next steps
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.

Website research
You can apply your three filters using online directories of financial advisers.

1. Adviser Book is the newest directory. 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 says it lists more than 18,000 independent financial advisers. Restricted ones should not be on there. Advisers get a basic listing free but they must pay a subscription to be directly contactable through the website. You will see a list of the 'top 20' near your postcode which unbiased says is based on how near they are to you.

You can use the site to apply my filters. You can also make other choices such as specialisms or qualifications. You can even pick a male or a female adviser.

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 the senior manager who is responbile for them and checks that periodically. It demands images of certificate for qualifcations.

You can filter by speciality, by independent or not, and by qualification. 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 8000 financial advisers who choose to pay the fees to be included and of those 3000 are full vouched for - you can only click through to the adviser website for those. 

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.

Next steps
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. If the answer is anythnig but clea that is a warning flag. Also ask what it will be in pounds (if they haven't told you) and then ask what you get for that fee.

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 Helper site. That is the new name for what used to be called the Money Advice Serivce. Its 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 joining Which? and subscribing to its Which? Money Helpline. That will cost you £10.75 a month.

If you have pension questions then you can still contact the Pensions Advisory Service which has a helpful helpline on 0300 123 1047. The service is now part of Money Helper. It is free and approved by the Government.

Specific advice about the pension freedoms which began in April 2015 can be found at Pension Wise. 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. Again, Pension Wise is now part of  Money Helper.

Footnote
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. All those terms are meaningless. Some call themselves International Financial Advisers which they abbreviate to IFA trying to give the impression that they are Independent Financial Advisers. They are not and are probably not even regulated. All these people are allowed to operate unregulated as long as they only sell unregulated investments in things like whisky, property, or art. Your money is completely at risk. 

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 Financial Conduct Authority number and check it out on the Financial Services Register. Not all individual regulated advisers are on it. But all regulated firms are so ask the adviser about their firm. Then use the contact details on the FSA Register to check with that firm is the person who claims to work for them does so. 

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 comprehensive as it was. 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.

Paul Lewis
05 August 2021
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