Choosing to employ a financial adviser can be pretty beneficial for you because you are sure to get some expert and professional advice. However, choosing the right financial adviser is also important. There are many things to consider while choosing a financial adviser, which include qualification requirements, type of financial adviser, fees and the kind of service you require. The following steps will guide you through the process:
Know Your Requirements
Before January 2018, there were only two types of financial advisers – tied and independent. However, after the said date, many reforms have been introduced because of the Retail Distribution Review and other types of financial advisers have been categorised. You have to know what your needs are, so that you can choose one of the following financial advisers:
Independent Financial Adviser – These advisers give advice based on comprehensive market analysis. Their advice is free from the influence of product providers and is unbiased. The payment is not commission based unless they disclose this fact to their client.
Restricted Advisers – These advisers would be restricted in the number of products they can advise you about. They will look at the entirety of the market but the product type would only be limited to a specific kind. There are also certain restricted advisers who explore varied areas but their access to providers is limited. Thus, visiting the restricted adviser would not give you access to the whole market.
Simplified Adviser – These advisers are similar to restricted advisers. They just provide some basic advice related to simple products.
When you visit the adviser, it is important that you ask about their services beforehand.
Check the adviser’s qualifications
Your financial adviser needs to be adequately qualified so as to handle your case with the professionalism you deserve. It is similar to hiring an accountant or choosing a doctor, you would not visit one without the necessary qualifications. Before January 2018, when consumers chose their financial adviser, they did not have any qualification standard to look up. Different advisers had different qualifications pertaining to different bodies. All these qualifications meant different things as well and thus, there was no way of comparison.
However, because of the Retail Distribution Review, post January 2018 times are better in these terms, as far as financial advisers are concerned. A coherent framework is in place which sets out some requirements for adviser qualifications. All advisers need to have a minimum qualification which is equivalent to an undergraduate degree, or the QCF level 4 requirements. These requirements are equivalent to first year of a degree.
New AES have been created by the Financial Services Skills Partnership and awarding bodies are now required to develop these new qualifications:
QCF Level 4
Independent financial advisers must be qualified in the following new areas:
Level 3 of Financial Protection
Pensions and Retirement Planning
Regulation and Ethics
Financial Planning Practice
Risk and Investment Principles
The fees that your chosen adviser quotes are negotiable and if you feel that you are being overcharged, you can discuss it. For properly negotiating the fees, you need to understand how you will be charged by your financial adviser and what the laws are. The following points will help you with this:
Ways in Which You Will Be Charged
Because of Retail Distribution Review, financial advisers are required to agree upfront about how much they would charge you. The ways in which you can be charged are as follows:
Flat Fees: This is a one-off charge and will cover everything from initial fact finding to future implementation. This is tailor made for client’s needs but costs could vary, depending on the adviser. There might be an initial recommendations fee and an annual flat fee for reviews or individual works undertaken by your adviser.
Hourly Fees: Although this way sounds easy and uncomplicated, it could act as an incentive for your adviser to take the work slowly and not finish it as soon as possible. The hourly charges vary from £50 to £250 per hour.
Percentage of Assets: This fee is a proportion of the amount you want to invest and the calculation would be based on a percentage of the assets. The initial fee could be between 1% and 3% and there would also be an on-going charge which is usually between 0.25% and 1%.
What is Trail Commission?: This is an annual charge (percentage) that is taken from the investment you have. Usually, it is around 0.5% per year and covers on-going advice. However, new laws have banned trail commission since concerns were raised that advisers were not providing services of an on-going nature.
For advice given before January 2018, trail can still be received and after that, it can be charged provided there has been proper disclosure of the commission to the customer. However, explicit fee will have to be paid by you to your adviser if they recommend an increased contribution to investments or switch you to new investments.
Banning of Commission from Financial Advice: Because of Retail Distribution Review, commission payments have been banned from financial advice. However, the ban only applies to pensions and investment products. Mortgage sales and protection products do not come under the said ban.
The main reason for banning commission for financial advice is that it biases the recommendation or advice of the adviser. They would tend to lean towards high commission paying products instead of being unbiased like they are supposed to be. Thus, consumers and clients would have unsuitable recommendations. Also, commissions make the payment system opaque since there is no clarity of the actual advice’s cost as it gets deducted from the investment.
The new reforms make the advisers work with a fee based system or ask them to reveal their commission so that the system is more transparent.
Modes Of Payment: There are many methods in which payment can be made to your financial adviser – you can go for direct debit, cash or an upfront cheque. Another way is to deduct the payment from your investment contribution but, because of its similarity to commission in the past, the amount must be decided upon between you and your adviser before deduction.
Get everything in writing
Your adviser’s recommendations to you should be in writing, that is – hard copy, so as to prevent any confusion in the future. If there is something you are finding hard to comprehend about the advice or product feature, do not hesitate to ask your adviser about it.
Since you are going to pay money, you should ensure that the advice is not generic in nature but applies specifically to you. It should cater to your situation and must be suitable for you as an individual.
Professional relationship based on trust
Since you are going to trust your adviser with your finances and would be listening to their advice, you need to forge a professional relationship with them that is based on trust.
Advance fact find to save time
If you get the fact find in advance, it could save a lot of time during your first meeting with your adviser.
You can use The Institute of Financial Planning and other search options on the internet for finding the right adviser.