Do You Trust Your Financial Adviser?

Many people who want to invest their money have little or no knowledge about what can often seem a bewildering array of products on offer. They have two choices: - either learn about the investment world themselves, or consult a professional adviser.

The perception of financial advisers in the UK is somewhat variable, ranging from the view that they exist only to enrich themselves at your expense, or that they provide a valuable service which allows their clients to make the best choices.

A survey conducted by Vanguard Asset Management in May 2013, asking 1163 people for their opinions on their interactions with financial advisers, came back with an overall 'average' score. Of the participants, 65%  had worked with a financial adviser, and the remainder gave their thoughts on the value they believed FA's provide. Around 41% of the total group thought that FA's provide good value, and 33% thought the opposite. What the other 26% thought remains unclear. What was clear for all those surveyed though, was both the quality of their relationship with their adviser, and the advice received.

Those who rate their advisers highly are more likely to understand what they're being offered and how it's being paid for. If you decide to visit a financial adviser, there are a few things you need to know.

1. What sort of adviser is he/she?

Financial advisers fall into two camps - independent and restricted. The independent adviser (IFA) can consider all products on offer in the market in order to help you meet your financial objectives. A restricted adviser on the other hand, is limited to recommending a certain number of products, or products from certain providers. It's important that you understand this distinction going in. A restricted adviser may recommend something that meets your needs, but in doing so disregards other market offerings that could be more advantageous. And there may be certain types of product the adviser doesn't advise on. So if you talk to a restricted adviser, make sure you understand just how restricted they are.

There's also the issue of guidance as opposed to advice. If your adviser talks to you in general terms about products - how they work for example, and perhaps terms and conditions attached, and he makes no specific recommendation, then you are receiving guidance. This is a non-advisory service, which leaves the decision on which product you actually buy down to you. This may reduce your costs, but makes it harder to appeal to the ombudsman if it all goes wrong. It would seem that independent advisers are the obvious option, but remember that some advisers are restricted because they specialise in a certain area, and from that perspective they may offer good value.

2. What qualifications does he/she have?

They should have as a minimum a diploma in financial planning that's recognised by the Financial Conduct Authority. And they should be regulated by the FCA.

3. What does he/she actually advise on?

Advisers are there to help you meet your financial objectives in the most efficient manner possible. The kinds of things they can talk about, that will reflect any investor's concerns regardless of where they are on the investment journey, include:

• Annuities - this is what you buy with your pension. It gives you an annual payment for the rest of your life.
• Protection products - income protection, life assurance and critical illness policies
• Mortgages - many varieties on offer, so good advice can be very useful
• Tax planning - the best way to minimize your tax bill on your investments
• Investments - products including stocks, ETFs, mutual funds etc. Finding the right mix to effectively build a portfolio

4. What will you pay?

On 31 December, 2012, a ruling known as the Retail Distribution Review came into effect. This means that commission payable to advisers on new product sales no longer applies. Instead the adviser levies an advice charge to his client. The idea is that all charges are now upfront and transparent. In the past clients paid commission, but it was often a stealthier form known as trail commission, that was paid to the adviser as a percentage of your investment on an annual basis. Because of this, clients were often blissfully unaware of just how much the product was costing them. It also gave the adviser an incentive to recommend products with the highest commission rates.

Make sure you clearly understand all the charges. General Insurance and mortgage products aren't covered by the Retail Distribution Review. However, in most cases you shouldn't be asked to pay for these, as the adviser takes an introductory fee from the product provider.

Charges can come in the form of a fixed fee, an hourly rate, or a percentage of your investment. If you want the adviser to review your investment periodically there will be an ongoing advice charge, which is usually a percentage of your portfolio value.

The whole rationale of the new advice charge is about transparency. It also removes the conflict of interest inherent in the old commission system. Transparency and advice charging = 'Trust'.

An adviser should be asking you about your family commitments, what investments you've currently got, what you're aiming for financially, and your attitude to risk. This is the beginning of the portfolio managment process. If you do find an adviser with whom you can build a good ongoing relationship, then there are some distinct benefits you can expect:

• He or she should keep you on track. As you can be your own worst enemy when it comes to porfolio managment, it's always good to have a knowledgeable sounding board available
• You will get expert assistance with your investments in the form of asset allocation and rebalancing advice
• Your adviser should be able to put together the most tax efficient strategy when it comes to taking the fruits of your investments

So the bottom line seems to be: - if you're clear and happy about what it will cost, and you're confident in the advice you're receiving, then there is no reason not to trust your financial adviser. When you first meet with that person though, be sure to ask all the right questions before committing yourself.

Darren Winters