The value of independent financial advice

The obtaining of financial advice is not exempt from that old rule: in life you get what you pay for. If you want such advice to be independent and unbiased, then you need to know where to look and be prepared to meet the cost. Advice invariably costs money, especially where financial products are concerned. How they are paid for may determine whether they are really suitable to your requirements and whether you are being independently advised. In many instances advice is not sought at all when it should be.

In general, UK consumers - that's us - retain a high degree of apathy over financial matters For instance it has been estimated by Alliance & Leicester that we collectively lose £700 million a year by paying over the odds for something as simple as overdrafts. The National Consumer Council reports that only 7% of people have moved their bank accounts in the past five years.

Do we shop around for the best annuity rate from our retirement pension? Apparently not; last year, according to the Association of British Insurers, only one in three took the trouble to do this, the rest complacently accepting the annuity rate offered by their pension provider.

We remain in dud funds and investments despite financially more attractive alternatives. We fall prey to "celebrity" advertising of financial products and buy payment protection insurance when it's not relevant and won't pay out anyway. When the FTSE100 index at the beginning of 2006 reaches its highest level for some years, there's a reported rush of novice investors wishing to use credit cards, remortgaging facilities or personal loans to buy shares.

We're learning to complain about poor financial advice, though. The Financial Ombudsman Service says it is now braced for busy times ahead and forecasts it will be dealing with around 125,000 complaints in the coming financial year. In the first year of the FOS operation, 2000, complaints totalled 25,000. A lot of this angst and financial misery would have been averted by seeking correct independent financial advice in the first place.

The Financial Service Authority (FSA), the city regulator, has been accused of failing to protect the public from the sharp practices of the financial services industry. Research shows that only 14% of people are aware of the FSA's existence and a former FSA director responsible for consumer education has questioned the "myth" that financial advisers help clients to make informed choices.

Organisations such as Which? maintain advisers should charge fees upfront or in instalments so as to remove the inevitable potential bias raised by product provider commission payments. Since June of last year this is the situation, more or less. Any financial adviser wishing to be known as "independent" (IFA) must offer clients the option of paying a fee rather than just taking commission from the provider. They must also offer a menu of payment options showing how charges compare with average industry figures calculated by the FSA (although these figures are being disputed as underestimating the average cost of advice). There are about 5000 IFA firms and 30,000 individual advisers registered with the FSA. But the picture is still a confused one for the consumer.

Previously there were two types of adviser: the IFA who could give advice and recommend products from across the market place; and the direct salesperson who only sold his employer's product. High street banks, hitherto usually linked to one financial product provider, have been credited with applying pressure on the Government which has resulted in a "depolarised" situation.

Now there's a third option for financial advice, the multi-tied one, whereby a limited range of providers are represented by the adviser. It has been argued that banks following this route will not choose such a range on product merit but rather on who will pay the most commission. Just to confuse the picture further we now have something called "whole of market" advisers. These are independents who can recommend products from any provider and offer the full range of financial services. What they don't provide is the option for the client to pay a fee; their remuneration is based entirely on product commission.

Some believe the FSA missed a real chance to turn IFAs into a true profession by its reluctance to insist on a fee-only charging system as commonly found with accountants and solicitors. Furthermore, particularly for the wealthier individual, paying a fee can be cheaper than letting the financial adviser collect commission on the product bought.

Much depends on whether it is investment advice or protection advice that is sought and the time taken by the adviser in putting one's finances in order. One thing is for certain, though; however you pay for the advice you receive, you should always consider using an independent financial adviser.

06 March 2006 © Moneyextra.com

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