How to choose a financial adviser – Forbes Advisor UK

If you are seeking expert guidance on complex financial products such as investments, mortgages and pensions, you may benefit from seeking the advice of a financial advisor.

According to research by the Financial Conduct Authority, only 8% of people in the UK use a financial adviser. However, this figure rises to 17% for people with more than £10,000 of investable assets and 38% for people with assets of more than £250,000.

While paying for financial advice may seem expensive, it can help you achieve your financial goals and prevent you from making costly mistakes.

According to financial advisor review site VouchedFor, customer inquiries increased by almost 6% in 2021.

Alex Whitson, managing director of VouchedFor, said: “Demand for expert financial advice remains high. This is not a surprise as we grapple with a cost of living crisis, inflated home prices, nervous stock markets, and complex retirement options.”

Here’s what you need to know about choosing a financial advisor, including the different types of advisors, typical fee structures, and the best questions to ask for the right advisor for you.

Remember: All investment is speculative and your capital is at risk. You may not get back some or all of your money. This applies regardless of whether or not you accept a tip.

What are the different types of financial advisor?

Financial advisors may also be called by their specialty, such as a mortgage, investment, or pension advisor or broker, or a financial planner.

All financial advisers in the UK must be regulated by the Financial Conduct Authority (FCA) and have achieved at least a Level 4 qualification in financial advice recognized by the FCA. Some financial advisors also have Chartered or Certified Financial Planner qualifications.

When it comes to the variety of advice provided, there are two main types of financial advisors:

1. Total Market Advisors

Financial advisers from across the market can provide advice on all available financial products and providers, rather than being restricted to particular products and/or providers.

They can call themselves Independent Financial Advisors (IFAs) as they offer unbiased advice based on comprehensive analysis of the entire market, without the influence of product providers.

Since 2012, IFAs have been prohibited from accepting commissions on investment and pension products, and instead must charge clients a fee (more on this later) to increase transparency of how they are remunerated.

However, they can still accept commissions from some insurance, mortgage and stock release providers. The commission is usually paid out of the customer’s premiums or other payments.

two. restricted advisors

As the name suggests, these financial advisors can only recommend:

  • a restricted set of products (such as mortgages)
  • products from a restricted set of providers (such as a limited set of fund managers)
  • or both.

Restricted advisors are not legally allowed to call themselves independent.

That said, it’s not necessarily a bad thing to use a restricted ‘whole market’ adviser, for example someone restricted to only advising on pensions but able to recommend products from all providers.

Restricted advisers may also be called “tied” if they work for a particular provider, such as a bank or building society, and can only offer products from this provider.

Linked Advisors will often be paid a commission as part of their compensation package for selling products to clients.

Research by the Personal Finance Society and NextWealth revealed that clients of restricted advisors pay an average of 28 basis points (0.28%) more in general fees than those using independent financial advisors.

What fees do financial advisors charge?

Fees vary depending on whether you have a fee and/or commission agreement with your advisor. There are three main types of fee structures:

1. percentage rate

This is the most common fee structure where you pay a percentage of money invested or managed. This breaks down as follows, based on data provided by VouchedFor:

  • Initial charge for configuring products: This typically ranges from 0.5% to 5%, with an average of 1.86%. However, 95% of advisers charge 3.5% or less.
  • Ongoing Fee for Product Management: this ranges between 0% and 3.2%, with an average of 0.77%. Only 5% of advisors charge more than 1% in ongoing fees.
  • Underlying Investment Portfolio Charges: These annual fees are charged by the provider of the underlying product, for example, custody and fund management fees. According to the FCA, these averaged 1.1% but range between 0.4% and 2.0%. These rates will also be payable under an hourly and fixed rate agreement.

Taking all of the above fees into account, the FCA found that customers pay an average of 1.9% in charges each year.

One of the drawbacks of a percentage fee structure is that your fee will increase with the value of your investments, which can add up to a substantial amount of money over time.

two. Fixed fee

A flat fee is typically used for one-off advice, such as combining pension plans, setting up an annuity, or producing an overall financial plan, where people don’t want ongoing advice.

Fixed fees vary significantly depending on the scope of work, but you should expect to pay more than £500.

3. Hourly rate

Some advisers charge an hourly rate that tends to range from £75 to £300 per hour, according to VouchedFor, with an average hourly rate of £193.

Consultants must provide an estimate of the number of hours the job is likely to take, and your invoice must show a breakdown of the hours spent.

What are the typical fees for financial advice?

Advisor comparison site VouchedFor has calculated the average fees for different types of financial advice over a five-year period, based on the fees charged by advisors in its database:

Source: VouchedFor

How can you find a financial advisor?

It’s worth taking the time to choose the right financial advisor for your circumstances. One option is to ask for personal recommendations from your family and friends.

Alternatively, comparison sites VouchedFor and Unbiased have a database of thousands of financial advisors, allowing you to filter advisors by experience, area, and client reviews.

Once you have narrowed down your options, you should ask the following questions:

  • Do you offer independent or restricted advice? As mentioned above, whether or not they advise on restricted products, you should look for an adviser that covers the entire market in terms of providers.
  • Are they authorized by the FCA? This is easy to verify by looking at the Financial Services Registry which shows if they are licensed and if so for what activities.
  • Do they have the necessary qualifications? Advisors must have a rating of Level 4 or higher on the Credit and Qualifications Framework. They also need to have an annual Professional Status Declaration.
  • What is your fee structure? This can be displayed on your website and should be available upon request.
  • How will they give their advice? In person, by phone or email, or through a written report?
  • Do you offer continuous service and how much does it cost?

Most advisors offer a free initial consultation during which you can discuss what you’re looking for and ask any questions. After this meeting, the assessor must provide a “key facts document” that outlines her fee and what her work will cover.

If you are satisfied with the advisor you have chosen, you will sign the necessary documents and undergo client identification checks. If you have paid for ongoing advice, you will normally receive an update from your financial adviser once or twice a year.

Where can I get free financial advice?

There are a number of resources available to people seeking general financial advice at no cost:

Employers can also offer access to free financial advisory services, either generally or for a one-time project, such as changes to company pension plans.

What happens if something goes wrong?

As financial advisers are regulated by the FCA, the Financial Ombudsman Service (FOS) will consider a complaint if you are not satisfied with the advice given or believe a product has been mis-sold.

The FOS will review your complaint and, if upheld, has the power to fine the assessors and require them to pay you compensation. However, you cannot claim investments on the basis that they have lost value.

Also, if you have an investment and the provider or adviser has gone out of business, you may be able to claim compensation from the Financial Services Compensation Scheme (FSCS). This covers up to £85,000 of eligible investments per person per product.

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