Eight steps to choosing a financial adviser

People have long memories when it comes to sharp financial practice. Over the past 30 years, a string of mis-selling scandals involving pensions, investments and commission-driven products such as payment protection insurance have left many sceptical about the wisdom of approaching someone for financial advice.

The way such advice is given has nonetheless changed dramatically in recent years, largely under the influence of regulators. Where once people may have been invited to “free” sessions, paid for by kickbacks or commissions on investments and products, today’s customers must pay an upfront fee — often running into several thousand pounds — for unbiased advice tailored to suit their needs.

These tougher standards were introduced in 2013 under the Retail Distribution Review (RDR), which forced regulated advisers to hold higher levels of qualifications and banned commission-driven sales. Nevertheless, quality varies and charging structures can still be opaque.

At the same time, individuals have much greater control of their financial affairs. Pension freedoms, the rise of cheap tracker funds and technology platforms make it much easier for those with a degree of savvy to run their own money, and cut out the middleman.

But not everyone feels capable of dealing with their own personal finances without a degree of help. So what is the best way to get that financial advice?

Step 1: Do you need a financial adviser?

Think carefully about what type of help you need, can afford and would value. Not everybody needs full-blown professional financial advice — it might be that you need only general guidance on budgeting and managing debt. Free sources of help include the Money Advice Service, Citizens Advice Bureau and, for the over-50s, the government’s Pension Wise service.

Stephen Kavanagh, chief executive at Chase de Vere, an independent financial adviser (IFA), says: “For many people, their basic financial planning should be paying off debts, building cash savings, paying off their mortgage, joining their company pension scheme and understanding the protection benefits provided by their employer.”

However, individuals with larger amounts of savings and investments or higher earnings can benefit from taking financial advice. Significant events in your life, such as inheriting money, having a child, getting divorced, or deciding when to take pension benefits are just some of the scenarios in which a professional opinion could prove a wise investment.

Karen Barrett, chief executive of Unbiased.co.uk, an online advice platform matching people to advisers, says that timely advice can be invaluable for people facing a big decision on which a lot of money depends.

“Things like setting up a pension, buying a home or planning for retirement may be rare or even one-off events, so you will probably have very little experience on which to base these crucial choices,” she says. “Though you may seek guidance from friends and family, or online, neither of those can give you as much confidence as advice from a professional.”

Step 2: Decide which type of service you want

If you require regulated financial advice — which typically involves an investment recommendation — do you need this for a single issue, for example, devising an investment strategy, transferring a pension or setting up a trust? Or do you need a more comprehensive ongoing service?

“The majority of regulated firms are keen to provide — and charge for — an ongoing advice service,” says Jason Butler, a financial wellbeing expert. “However, this might not necessarily be good value if your needs are simple and you have the discipline to review your basic financial needs each year. It might be that you need help to devise a plan initially, and then check in with an adviser every three years or whenever there is a major change.”

Before you start your search, you also need to consider whether you want face-to-face advice, or whether you are happy to receive advice or guidance remotely by phone, or via a low-cost online platform. It may be that you just need some initial information, and will then be happy to make your own decisions.

Bear in mind that advisers and wealth managers based in expensive locations, such as central London, will have expensive fees to cover their overheads.

Step 3: Independent or restricted advice?

Advisers fall into two broad categories — independent or restricted. An independent adviser will carry a greater up front cost, but can recommend their pick of retail investment products from across the market.

Restricted advisers, as the name suggests, can only usually recommend certain types of products or those from a limited number of providers.

Most of the larger and better-known investment houses give restricted advice. These include St James’s Place, Hargreaves Lansdown and Tilney.

“Many advisers choose to be restricted because it means they can sell their own products and investment funds. This is understandable from their perspective, but it isn’t such a good idea for clients if their products are expensive and poor value,” says Mr Kavanagh of Chase de Vere.

Step 4: Choose which level of advice you need

The more your financial adviser does for you, the more you will pay. At one end of the scale, wealth managers — whose clients typically have investable assets of more than £1m — will offer a suite of services from investment services to tax planning and divorce.

IFAs also offer investment advice, and can recommend specific products such as pensions or annuities, plus bolt-on services including inheritance and tax planning, mortgage advice and insurance brokerage.

Many firms of IFAs employ chartered financial planners. While they cannot usually make investment or product recommendations, they specialise in planning for life events such as when to take income from property, pensions or investments in the most tax-efficient way possible.

One growing area of the market is “robo advice” — cheap, online platforms which assess an investor’s appetite for risk via a questionnaire, after which investors can act alone in choosing their funds based on the assessment.

Aside from cost, your choice of financial adviser comes down to how much confidence, expertise and time you have to manage your own investments. If you want to do something complicated or long term in nature, such as building a retirement plan, transferring a final-salary pension or managing an inheritance, an adviser could offer you valuable knowledge and save you time. If, however, you are simply putting money into a self-invested personal pension (Sipp) or a stocks and shares Isa, you might consider doing this yourself.

The DIY option

Could you save adviser fees?

A broad range of DIY investment platforms make it easy to hold shares, bonds, funds, exchange traded funds (ETFs) and other instruments within a tax wrapper. However, the choice is so great your problem is likely to be making a selection to build a diversified portfolio.

Some platforms have lists of recommended funds to help whittle things down, but investors should be aware that there may be conflicts of interest here; a fund supermarket may also be an asset manager, offering its “own brand” potentially at the expense of other products.

Funds may have annual management and performance charges, and there may be additional charges for dealing in shares. On top of this, platforms will charge an administration fee, which can be a percentage of your holdings or a flat fee.

Robo advice platforms, such as Nutmeg, Moneyfarm and Strawberry Invest, typically bundle together cheap investment portfolios using ETFs. Although investment choices are deliberately limited, they are very easy to use and usually consist of a selection of high, low and medium-risk options.

Being a DIY investor means researching, buying and managing your own investments. There are plenty of guidance and research tools out there, but you will effectively be on your own when it comes to decision making. Also, be aware that you have fewer rights to cancel or complain if you buy an investment product without taking financial advice.

Finally, if you’re an employee, check whether your employer gives you access to one of the new digital financial wellbeing platforms such as Salary Finance, Neyber or Nudge Global. These provide engaging investment material (via SMS, email or post) which is tailored to your interests and situation and at no charge to the employee.

Jason Butler, a financial wellbeing expert, says your employer might also have a panel of pre-checked financial advice firms that understand your company’s benefits package and offer special advice charge terms — possibly even subsidised by your employer.

Step 5: What are the charges?

Many advisers will offer a free introductory session, with a list of fees provided at the end. There are a number of ways that financial planners and wealth managers charge for their services. These are fixed initial and service fees; hourly charges; percentage of assets invested (often called ad valorem); proportion of tax saved; product commissions on non-regulated tax shelters and insurance products. Sometimes these charging methods are combined.

Mr Butler examines financial advisers’ charging methods in his book Wealth Management: How to plan, invest and protect your financial assets. He writes: “The key point is to know what you’re paying and why. Regardless of what the rules say and no matter how convenient it might be, I think you should agree the fees for the advice and services you use and pay them yourself, and ideally avoid paying them by way of deductions from financial products.”

Mr Butler is of the view that an adviser who agrees and charges explicit fees rather than relying on payments from transactions or from product deductions may be more expensive upfront, but will be less conflicted in the advice that they give. It is also easier for you to determine whether or not those fees have been good value for money.

“Avoid fees which are based on a percentage of your capital as these quickly build up over time to eat up a large slice of investment returns and bear no relation to the value delivered,” says Mr Butler. He adds that for the same reason you should avoid paying advice fees by deductions from financial products such as investments or pensions.

You should also be wary of exit fees. Some investment providers, such as St James’s Place, charge up to 6 per cent if an investor exits within five years of taking out the plan.

Step 6: Finding an adviser

You can search for an adviser using various directories or databases. Organisations such as Unbiased.co.uk and VouchedFor.co.uk have lists of qualified financial advisers, and you can tailor your search by region or types of advice required. For example, you can say you want someone based within 10 miles of your home, or specify a male or female adviser. You can also ask for someone who is qualified in a particular area, such as pensions or mortgages.

Whichever adviser you choose, you should ask to see their qualifications. While all regulated advisers will need to have achieved a benchmark level of professional qualifications, you should understand what qualifications an adviser has in addition to this. This is particularly important if you have complex needs or want advice on a specialist area such as pension transfers, inheritance tax planning or long-term care.

Broadly speaking, most IFAs will have the basic certificate in financial planning, but experts advise looking for someone with a diploma or advanced diploma in financial planning. Alternatively, find a chartered or certified financial planner: this requires an adviser to have a minimum three years of experience and to have signed up to a code of ethics.

“One of the important things is for IFAs to keep updating their skills,” says Ms Barrett at Unbiased.co.uk. “So ask your adviser about their ongoing training.”

To check that an adviser is authorised and for suggestions of questions to ask, try the Financial Conduct Authority, fca.gov.uk, or to check an individual’s status as a certified financial planner, see financialplanning.org.uk.

Step 7: Choosing the right person for you

As with most things in life, personal recommendations carry a good deal of weight. If a friend or a colleague in a similar financial position to you (or even your accountant or solicitor) can suggest someone to contact, that is a great place to start.

It is still no guarantee of success, however. Even if you have a recommendation, you should ideally contact two or three IFAs so you can make a comparison.

Experts recommend having an initial face-to-face meeting with each. You can then make a decision based on who meets your requirements (see box below) and who will give you the best advice and service.

Ms Barrett says: “For the best kind of made-to-measure advice, look for an IFA who is also a chartered financial planner. They will not only assess your current circumstances, but also create an ongoing plan to help you manage the financial side of your life and align it with your goals.

“Make the most of your first meeting by thinking about those goals beforehand, and have all your paperwork ready. Ask your adviser about the relevant qualifications and experience they have to the particular work you are needing them to do.”

Step 8: Keep your finger on the pulse

At your first meeting, find out whether you are entitled to ongoing advice or reviews of your products and whether you will have to pay additional fees for these.

A sign of a good adviser is that they want to talk to you about your personal circumstances rather than just the products they are investing in. You want someone who understands your lifestyle, requirements and attitude to risk, and will translate these into actionable decisions.

Make sure you are getting all the information you need. All IFAs are required by the Financial Conduct Authority to carry out a full fact-finding exercise to prevent their clients from, say, being advised to invest in high-risk funds when they have large amounts of unsecured debt. Before you buy any product, the adviser must give you a key features document that explains details such as the level of risk, how the product might work for you and commission charges.

The most important point to remember when choosing an IFA is that you are in control. It is easy to feel cowed by someone’s greater knowledge of a subject, particularly in complex financial matters.

Experts recommend keeping an eye out for warning signs such as an adviser trying to sell you their own products or investment funds, or finding yourself being recommended products that you don’t understand.

The solution, in that case, is straightforward. “If you have an adviser who you’re not comfortable with, dump them and find a different one,” says Mr Kavanagh.

Ten questions to ask your would-be financial adviser

1. Do you give independent or restricted financial advice?
2. Do you sell your own company’s products or investment funds and if so how I can be convinced they are the most suitable products for me?
3. What fees do I pay now and how do I pay them and how much do I pay on an ongoing basis?
4. What initial advice and ongoing service do you provide? How is this service delivered — is it face-to-face or remotely, by email or telephone?
5. What level of professional qualifications do you have and are you qualified in any specific areas where I want advice?
6. How long has your company been in business and how big is it?
7. How long have you been working as a financial adviser?
8. Do you specialise in a particular area?
9. Will I always see you or will other people in your company look after me as well?
10. How often will you review my portfolio?