Monday January 15, 2007
Guardian Unlimited
ALONG WITH dentists and accountants, independent financial advisers (IFAs) must top the list of scary-but-good-for-you professionals. Because whereas you and I might like to stick our head in the sand and stay there when it comes to financial planning, an IFA will drag us out by the neck and make us look our finances in the face.
"Independent financial advisers are the only type of advisers able to select from all the products in the marketplace," says IFA Promotion (IFAP), the industry body that represents the 9,000 IFAs in Britain. "They make sure you get the right product for your individual needs." And by "product" they're not talking about shampoo - they mean financial products such as mortgages, investments and pensions.
There are more than 30,000 such products in the UK, about the same number as there are in your average supermarket. For the scared among us, then, it is perhaps easier to think of IFAs as a sort of personal shopper, guiding you through the aisles of a financial supermarket, picking out the best deals and making sure you don't forget your essentials.
Why get an IFA?
At certain times in your life you need to make financial decisions. Getting a mortgage, saving for retirement and protecting your family with life assurance are all critical financial decisions. Unless you are handy at personal finance DIY, you are likely to need help in picking at least some financial products to make sure you choose what suits your needs best. This is the job of the IFA.
Crucially, an IFA is independent of any product. This is important because there are three types of financial adviser out there, and only IFAs are bound to offer impartial advice. The other two are tied and multi-tied agents.
Tied agents offer advice on the products of only one provider. If you walk into your high street bank and ask for mortgage advice, they will only discuss their own products. This is tied advice - they can only sell you what they've got, and that might not be what you need.
Multi-tied agents have a wider product range across several financial institutions.
"IFAs offer unbiased advice," explains a spokesman at IFAP. "They act on your behalf and recommend the most suitable products - if any - after researching the whole market."
IFAs are authorised and regulated by the Financial Services Authority (FSA) and bound by their rules. These oblige IFAs to act in your best interests and be transparent about pricing.
At the checkout
"Costs depend on who you go to," says Adrian Kidd, director of Mint Financial Services, an IFA in south London.
In the bad old days, products offered by IFAs would rarely have price tags attached. But under new FSA rules, IFAs must now show you a menu of prices before selling anything. Any commission earned on the product must also be declared, and IFAs must now give customers the option to pay a fee rather than commission.
IFAs, explains Kidd, charge in three ways. First as a fee or hourly rate, which is typically free for the first meeting and subsequently from £50 to £200 an hour. The second way is indirectly through commission earned on the product sold, and the third is a combination of fees and commission.
Arranging a mortgage is a typical example of how charges can differ, says Kidd. "Some people charge for the advice, others don't."
The company lending the money will always pay commission, known as a procurement fee, to the IFA. For a £100,000 mortgage, Kidd explains, that could amount to £400.
Some IFAs will be happy to give free advice and bank on making money on the commission, while others will charge a standard fee.
"I charge a fee of £150 for engagement which can be offset by the procurement fee on completion," says Kidd. "This makes sure I still get paid for the advice and work even if the mortgage falls through."
Others, however, aren't so generous. "Some mortgage brokers may charge £500, or 0.5% of the loan amount, upfront," says Kidd. "It's wise to shop around. Go with someone you like and who you think you can trust, as sometimes cheapest is not the best." Also make sure they're qualified.
Quality control
All qualified IFAs in Britain are required by the FSA to hold a Certificate in Financial Planning (Cert FP). But these are an IFA's most basic qualification. After that, advisors can study for incremental qualifications as they progress, or specialist qualifications to become expert in one area, such as mortgages, pensions or long-term care.
There are literally dozens of different qualifications, a full list of which is available here.
Again, it's a bit like the supermarket. If you wanted to know about meat you would ask the butcher, or for bread you would ask the baker. While you might expect both to know the basics of hygiene, customer care and handling cash, you wouldn't expect them to do each other's specialist jobs.
Making your choice
When looking for an IFA the key things to consider are location, areas of expertise, qualifications, philosophy (maybe you only want ethical investments), whether you prefer a male or female adviser (like doctors, some people are more comfortable with an IFA of their own sex), and any recommendations from friends, although do take care as your friends might have very different financial needs, and consequently their IFA might not suit you.
IFAP advises that before making your choice you should approach at least three IFAs and get quotes from them all. They also suggest visiting the offices in person to get a feel for the business and the people you will be dealing with.
Finally, on your route to finding the perfect IFA, if you don't understand something then ask for it to be explained. "Never be frightened to ask," says IFAP. "It is your responsibility to understand the terms under which you are agreeing to do business."
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