This is a page that I always knew it would be tough to write. As someone with 40 years experience working in financial services, it is not surprising that I have seen the good, the bad and the downright sinful amongst those purporting to be financial experts. I think a great deal of care needs to be taken in entrusting the future of your money to someone so take the time to read this guidance. This article is a reasonably detailed introduction but can only address the main considerations. Subscribing members can ask Mark to assess any potential candidates.
Of course, you don’t have to pay for advice at all, but in my opinion, you should, at least for a period until you have learned the basics.
It’s all about sales, innit?
In recent years legislation has thinned out the number of people who could claim to be financial advisers when all they really did was sell financial products that were offered to deliver the maximum profits for their employer. But don’t think that here I am just talking about the “allied crowbar” salesmen (they were mostly men) of old. I left the once ethical Halifax Building Society when my working life started to mutate into a set of sales targets. Most bank employees will still be working in a sales environment and although stock brokers may have posher accents and have expensive educations, many are still looking to earn bonuses based on how much money they can get in for their firms.
I have always remembered that when I was 27 years old and a wet behind the ears pension trustee, I was ushered into the office of the man looking after the UK stock market assets of my employer’s pension fund, even then about half a billion pounds, and he was on the phone. After he put the phone to give me a briefing on his role, he told me that he was talking to a stockbroker in the City. He said something like: “Don’t think he is important. He wants to sell me some shares. He will tell me the price is cheap if I buy a big block. He knows I control a lot of money. He could just as well be selling oranges at the street market – the principles are identical”.
So, the first lesson is this: look for an adviser who loves the process of investing and the challenges it presents, not a sales person pretending to be an adviser. Of course, any professional will try to sell themselves and their business proposition to you so what I mean is to avoid someone that sells plans or products. There is no such thing as the “XYZ Investment Strategy” which is so much better than anyone else’s. That is just a product overlay, with extra sales costs that you will end up paying.
How to tell an adviser is competent?
These days all advisers have to be authorised by the regulator and to get authorised they must have a moderate level of appropriate education as a minimum, but as this is only at about A Level standard, it is not really sufficient to demonstrate expertise.
If you are consulting an IFA or bank employee, or someone who works for a financial sales company like St James Place or Towry, then you should look for someone who is a Chartered professional in a relevant discipline or has a business studies or financial services degree. Stockbrokers will have qualifications from the UK Society of Investment Professional as a rule and ideally should be CFAs, but as a minimum will have the Investment Management Certificate (as does your writer) or an equivalent qualification.
But that is only part of the story. You need to know what experience that person has and what resources are available to them. Many advisers work to a ‘house’ policy, so will be passing on recommendations from a central head office or other resource. Very few IFAs have true expertise in investments as they are firstly trained as financial planners. As a crude rule of thumb, IFAs are much better at financial planning than stockbrokers, stockbrokers have a major wider experience in managing investments and a few are good at both – the latter are the ones you should try to find. If you want to buy shares or other investments traded on a stock market, like option contracts or other derivatives, you will always need a specialist, most likely to be a stockbroker.
Of course most advisers work for a firm or even a large plc. So how do you know if they are any good?
Restricted or born free?
In the mainstream of regulated financial advice, you will find firms calling themselves various things. The general phrase IFA is now in common use (standing for independent financial adviser, but actually quite a lot of firms are not actually independent) and titles like financial planners and wealth managers are widely used too.
All financial advice that leads to personal recommendations in the UK is regulated and advisers need to be registered and authorised with the FCA (Financial Conduct Authority). It is easy enough to check the FCA register on line and that is always a good starting point to check out someone you don’t know. Advisers must tell you if they offer truly independent advice or restricted advice. Some firms are a bit devious about that, so you need to read carefully the disclosure documents that you are given right at the start of any potential business relationship.
More simply, just ask directly – ‘Are you offering restricted advice?’. If the answer is yes, ask for more details as that may not be a bad thing – it depends what the restrictions are. Some advisers may say they know nothing about pensions, so they restrict their proposition to exclude pensions advice, which is fine if you don’t need pensions advice.
Where restricted advice is best avoided in my view is where the restriction means that investments are not selected from the whole of the market but a limited ‘panel’ or ‘selections’ that are offered by the firm itself or an associate business. Such offerings are ALWAYS in the interest of the firm, not the investor, in one way or another.
Pricing
This is the factor that will possibly be seen as most relevant by some investors. I would agree that it is very important but quoting someone clever from the past, as is my habit: ‘a fool is a person who knows the price of everything and the value of nothing’.
Having said that I will immediately admit that most financial advisers charge far more than their services are worth. They also apply a very unfair and irrational charging process: fees based on a percentage of the sum you have invested.
This is for one simple reason: the fees are designed to replace what used to be commissions (now illegal) and everyone knows that commissions are almost always a percentage. Utterly ridiculous arguments are put forward to defend this proposition, frequently ones that are bordering on dishonest. For example: ‘we do more work and carry more risk if you have a lot of wealth’, which is a brazen lie if your money then goes into an off the shelf or model portfolio which is run exactly the same for every client.
I have believed passionately for my whole life as a financial professional that investors should pay fees that relate to the actual cost of the services they are getting. These should be fixed monetary amounts varying only in line with the time it takes to do the work. If the amount of work is complex and requires a high level of expertise, you would expect to pay a higher hourly rate of course but also to be satisfied that your adviser was experienced and well qualified.
I intend to publish some examples of the real price of what advisers do in the members area of the site, to assist people in negotiating and making choices.
Policy and Individual Expertise
It is most important to try to work out if the adviser you are assessing is able to personalise your advice or is just a skilled mouthpiece for the in house policy of her or his employer. Many wealth management firms make the bulk of their money from fund platforms and collective fund strategies that they have designed in house and which they control, so their advisers are motivated to push you into such offerings. There is an article illustrating that here.
Assuming you would avoid such an adviser because in my view that person is a sales operative, what else can you look out for. I suggest these are the essential points:
- Experience – at least 10 years since qualifying
- Personal commitment – is the adviser putting their money in the places they suggest you put yours
- The ability to explain clearly to your satisfaction how they do their research and why they add value
- Some evidence of past results – most advisers can supply anonymously some real life portfolio histories.
- References from other clients. In fact a personal recommendation from a friend you know is also investing money and is pleased with an adviser is the best possible starting point.
- An openness about past mistakes and an honesty about what might go wrong – all advisers blunder occasionally and I have always said I am happy to get 75% or more of my investment selections right when reviewed over a 5 year time horizon. I have made the odd major cock up!
- Intelligence – hard to measure, but generally possible to detect over the course of a couple of meetings.
- Courtesy – you don’t want to change advisers unless it is really necessary, so you need to have mutual relationship of respect and trust and in essence to like each other!
Tips and Hazards
Selecting an adviser is best not rushed. If you have a spouse or partner, get them involved, even if they are not interested in the financial aspects because they can assess the candidates with you. A person with no aptitude for handling money is often a good judge of character!
Beware of expensive city centre locations, lots of free promotional goodies and offers of days out to events. You will pay for all that, handsomely, in the fees package.
Assess the scale and security of the advisers business. I would always visit their place of work. If it is attached to their home, that is not necessarily a negative (in fact some of the very best most ethical advisers I know work from home), but they must have modern technology and appear to know how to use it. If the firm is very small, ask about what happens at holiday time or if your adviser is ill – there should be a locum arrangement in place.
Find out how long they have been trading, how many clients they have and what the average investment assets are per client. A single adviser cannot properly look after more than about 180 clients (less if they don’t have support staff) if they are offering annual reviews. A competent adviser will have clients with average balances in the hundreds of thousands or millions, but they may still happily deal with more modest pots.
Don’t accept any explanations you don’t fully understand. There is never a need for the ordinary private investor to get involved with any sort of financial planning or investment that cannot be easily explained to a person of average intelligence.
If something sounds too good to be true – be very, very careful indeed! To quote the cliche – there is no such thing as a free lunch!
Read documentation you are given carefully and don’t pay for anything up front.