When is an IFA not an IFA? What are the differences and who does what.
Would you like your money to work better for you? Do you need some financial advice? If you said yes to these, then you will probably want to talk to a financial advisor who can tailor plans just for you. But, how do you know if you are talking to the right person, are they qualified, and how much will it cost?
Financial Advisors – the differences
An Independent Financial Advisor (IFA) is not tied to any specific schemes or companies. They can provide all types of financial products including investments and pensions, and can provide these from any provider.
A restricted Financial Advisor provides the same services as an IFA but only provides a restricted range of products, and/or from a restricted range of providers.
A Financial Advisor – (non-investment) is someone who is also not tied to any specific schemes or companies and covers all different types of financial planning EXCLUDING investments and pensions.
The term ‘Whole of Market’ can sometimes be associated with a Financial Advisor – (non-investment), mortgage broker or insurance broker. This means that the advisor can offer products from the whole of the market. Other advisors may not offer products from the whole of the market or may even be tied to a particular provider, or a small group of providers (known as a ‘panel’). It is worth asking whether your adviser works from the whole of the market, is tied to one provider, or works from a panel of provider.
All advisors must be Financial Conduct Authority (FCA) authorised, either directly, or as part of a network, in order that they can legally provide advice.
How does the FCA work and what does it mean for me?
The FCA regulates individual financial advisors and financial advice firms to ensure all advisers ‘treat customers fairly’ and adhere to FCA rules. This also ensures that the advisers knowledge is sound and up to date, and that their charging structure is made known to clients and is transparent. This allows the industry to remain stable and the consumer to understand what service is available to them and at what cost. The FCA has the power to investigate and enforce rules and regulations. This helps protect consumers and ensures advisers are working within FCA rules.
Retail Distribution Review (RDR)
As part of their consumer protection strategy, the FCA established RDR – the Retail Distribution Review.
As a result the financial advice market changed after 31 December 2012, with the aim of improving financial advisors professionalism, credibility and integrity.
Since 1 January 2013, you will see changes in what financial advisors call themselves, the qualifications they have, and how and what they charge for their services.
Financial advisers are required to pass examinations on a broad range of financial and regulatory subjects to ensure that they are able to provide advice to the required standard.
Qualifications are issued by a number of different examining and awarding bodies, and as a result there are quite a few qualifications that are deemed appropriate. The majority of qualifications have been assessed under the national Qualifications and Credit Framework (QCF) to establish what level they are.
Typically a mortgage broker would have a mortgage qualification like CeMAP or DipMAP.
Protection advisers don’t have to have any particular qualifications. However, most credible financial advice firms would require their advisers to have at least level 1 CeMAP.
Any financial adviser who sells investment products, securities or derivatives must have a qualification like DipFA. Financial advisers (Independent or Restricted) also need to hold a current ‘Statement of Professional Standing’. These are issued annually, subject to the adviser meeting certain standards, by various bodies authorised by the FCA.
Advisers may also hold higher level qualifications relevant to their particular advice areas, as well as accreditations such as Certified Financial Planners and Chartered financial Planning firms.
How do I pay for advice?
Formerly IFA’s could have been paid with commission from the providers of financial products, or by way of a Fee, however since 31 December 2012, they can no longer receive commission on the sale of retail investments or pensions. Instead they charge Fees for the provision of Financial Advice.
Financial advisors are now required to openly disclose their fees before undertaking any paid work for the client, and their fees must be agreed by the client before any work is undertaken. As a client, this enable you to understand what service you will be receiving, and for what cost. This means you can shop around to find the best value for money.
However, all advisers are allowed to receive commission from the sale of products that are not investment or pension products, such as life assurance and mortgages.
Advice for Free?
There is no such thing as free advice. Good advice will cost you money, and let’s face it, you get what you pay for. The only thing you may get for free, sometimes, is an initial consultation, which most financial advisors provide at their own expense. This is your best opportunity to find out which services the adviser can provide and for what cost.
Those advisers not carrying out investment advice can provide advice without charging a fee and by taking commission from the providers instead. All reputable advisers will provide you with a full breakdown of the provider options, so you can be reassured you are getting the best deal.
For IFA’s financial advice is not provided free, as you will have paid for it somewhere along the line, whether it is paid up front by you, or whether it is paid by the product provider as a deduction from your investment. This means that you are not investing all your money into the plan, and are paying the adviser for setting up the plan for you.
So, how much would an IFA charge – those who do investment advice?
The average cost for financial advice in the UK is currently around £150-£250 per hour. However, this can depend on your location within the UK, whether there is any specialist knowledge required, and the qualification level of the advisor.
An advisor may have fixed charges for certain products. Remember, there is no harm in asking to negotiate on fees.
Unbiased.co.uk has a simple list of various options that you may be offered to you, including:
Please note – All Fee types below may also be subject to VAT in certain situations.
- Fee – the cost that a professional adviser charges for providing their services.
- Fixed fee – some advisers may be prepared to undertake a specific task for a fixed fee, such as setting up a pension policy. Make sure you ask them precisely what is and what is not included in the agreed fee.
- Hourly rate – where the client pays for each hour (or part of an hour) of the adviser’s time. You should be given an estimate of how long the work will take and therefore how much you might expect to pay.
- Percentage of assets – often used by advisers and wealth managers who manage a portfolio of assets and investments for their clients. They take payment for their services based on a percentage of the value of the total portfolio.
- Percentage of mortgage – where a mortgage adviser or mortgage broker is paid at a rate equivalent to the agreed percentage of the mortgage loan you are taking out.
- Retainer – in financial advice, this is similar to ‘percentage of assets’ where the adviser takes payment based on an agreed percentage of the value of the assets or by working out a time/cost basis for regular management of your financial affairs.
- Commission – where the adviser takes payment for their services as commission from the company you buy your product from. After the Retail Distribution Review (RDR), financial advisers can no longer be paid commission on products that can be broadly described as ‘investments’, typically investment and pension policies. For other kinds of financial ‘products’ (i.e. the things which you might buy from a financial adviser like insurance or a mortgage) advisers are still allowed to be paid by commission from the provider.
It is therefore very important that you understand exactly what the advice is going to cost and what the cost implications could be on your investment, both now and in the future.
Evolution Financial Planning are a team of Financial Planners (non-investment), whole of market advisers. We are not tied to any panel. We will shortly be bringing on board investment specialists who are Independent Financial Advisors, so we can provide you with the full spectrum of financial advice.