The following information on IFAs takes the selling of pensions as an example but the same principles apply to almost any area of personal finance. (You can also read about them specifically in relation to mortgages in MortgageSorter ).
What is an IFA
The people you can buy financial products like pensions from break down into three main categories.
Tied Agents: are tied to a particular company eg they are an employee of a large pension provider in which case they would only be selling that company’s range of life insurance, mortgages, pensions etc.
Appointed Representatives: are self employed agents who only deal with one pension provider eg they have a High St. office with their own name, so look like a genuine IFA but they’ll only recommend one pension provider. By law they have to make this clear to you
The genuine Independent Financial Advisor.
Why using an IFA is best
Personal finance is a complex subject whose history is littered with bad decisions that have resulted in unnecessary financial hardship.
A genuine Independent Financial Advisor is a highly experienced professional who has to give you “Best Advice” BY LAW
This means gaining a complete understanding of your particular circumstances before deciding which pension plan is the best for you.
After the pension selling scandals anyone selling a pension has to ensure they have fulfilled various criteria including a detailed questionnaire (“the fact find“) which they have to go through with the pension buyer.
While it’s still possible for an unscrupulous IFA to sell you a product that’s really more in their interest than yours (ie they get more money for it), if anything goes wrong you are much more likely to be able to claim compensation.
The IFA assesses all of your circumstances and makes recommendations from all the pension providers in the market.
There are a huge number of products to choose from, and the IFA can easily see which ones are best for you – not least because there are several computer programmes they can subscribe to which keep them updated on the latest products.
If you go for the perhaps cheaper option of Direct pension providers – where you buy your pension by Execution Only - then, because you chose the pension yourself, if things goes wrong, you’ve nobody else to blame and would be much less likely to be able to claim any compensation later on. (Unless the pension provider went out of business, where you’d be covered by the Policy Holders Protection Act).
The IFA should be genuinely independent and have your interests at heart and not the interests of an insurance / pension company or their own commission.
Choosing an IFA
We would recommend that you choose a local firm of IFA’s with a good track record and an experienced, mature person at the helm.
Ideally you want a word of mouth recommendation but the problem with this is that people don’t necessarily know how good or bad their IFA may be at giving financial advice as opposed to being a charming person to know. And one thing an IFA is likely to be is charming… (See Watch out for the charmers).
Unlike the tied agent and the Appointed Representatives, the IFA really has to know the whole market and give you best advice. If they haven’t, further down the line you should be able to get compensation.
You want someone who’s taking the long term view of their career as an IFA. It really is in their interests to give you the best service because they’ll want you to recommend them to your friends and relatives.
Avoid anyone who seems at all “fly by night”. While there are very few fast buck merchants around always watch out for them. Trust your instincts. Remember that the basis of the law is “buyer beware”.
An IFA will usually see you free initially and then charge either an hourly fee – from £30 to £100 – or you can agree on them taking a commission.
The commission usually comes from the company whose products they have recommended. To read more about this now see Fees versus commission.
Also see Watch out for the charmers.
Questions to ask your IFA
- Do you usually deal with someone in my earnings range ? (If IFAs only deal with wealthy individuals, as some do, they may not give you the right attention).
- How long have you been in business for ?
- What qualifications do you have ?
- Are you truly independent ?
- Who are you regulated by ? Usually the Financial Services Authority. Solicitors and accountants acting as IFA’s should be regulated by the Law Society or the Institute of Chartered Accountants. If they sell over a certain amount then they too have to be registered with the FCA. (see How to check up on an IFA)
- What parts of personal finance do you specialise in ? (e.g. they may they deal in mortgages, investments, life insurance, health insurance – ideally you want a pensions expert).
You may find that it’s wise to judge your IFA’s on how they deal with your questions. Directly? Or do you have difficulty in getting a straight answer.
Any good IFA should come over as straightforward and honest. If they don’t specialise in pensions they should be mature enough to know that recommending a more suitable IFA to you is good business all round.
Fees versus commission
The number of fee based IFA’s has grown rapidly in recent years. The idea with fees is that you pay these charges up front so that there’s no suggestion that the IFA is reliant on any commission for the pension plan they recommend i.e. the advice is genuinely independent.
The standard charge at the time of writing is between £100 and £200 an hour (usually after a free initial meeting).
The IFA should be able to give you a quote. But it’s most likely to be an estimate and the problem is, you see, that no one’s finances are as simple as may first appear…
Alternatively they may charge on a transaction basis e.g. you pay a set amount for a report. Though remember, if you don’t follow the IFA’s advice you’re still paying for it.
Many IFA’s will give you a guaranteed fee ceiling.
The various pension scandals have given IFAs a bad name. While this may have been deserved by some the real culprits were the pension providers who created a market where bad products were pushed to the public by commission based rewards for the sellers.
As a result the better class of IFA has moved toward the fee based payment system.
Pros and Cons
Personal finance is a highly complex area. Why should an experienced professional not charge similar rates to a lawyer or accountant?
The fact is that if you pay a fee you have can be much more certain that what is being recommended really is in your best interests – but note it is not guaranteed. You should never totally trust any professional.
However if you take the apparently cheaper commission based route – where the IFA is paid a commission by the pension provider – you definitely cannot be so sure that the IFA has not recommenced a particular pension for reasons that best suit them.
In any event, with commission payment, you can be sure that while you might not be paying in the short term, the commission being paid by the provider to your IFA will in the end be paid for by you ie from your pension fund charges.
Who regulates IFAs
The Financial Conduct Authority (FCA) vet IFA’s who must demonstrate professional competence by passing exams and agree to follow strict rules. If an IFA breaks the rules she / he faces tough action and risks being debarred from business altogether.
They regularly visit IFAs offices. Perhaps a good sign for the public is that IFAs tend to hate them.
How to check up on an IFA
Call their Consumer Helpline on 0845 606 1234 and they will quickly tell you what qualifications your IFA has and what type of advice she / he’s allowed to give you.
They also have an “Industry Helpline” which you could use to check up on a firm of IFAs. Tel 0897 334 455
Complaining about IFA’s
The FCA publishes a guide on how to complain.
Other Ways to Buy Pensions
Tied agents are tied to a particular company i.e. they are an employee of a large insurer / pension provider – say Norwich Union, in which case they would only be selling Norwich Union’s products.
Appointed Representatives are self employed agents who only deal with one pension provider. i.e. they have a High St. office with their own name, so look like a genuine IFA but they’ll only recommend one pension provider.
By law they have to make this clear to you.
Solicitors and Accountants
useful addition to income for some lawyers and accountants is selling personal financial services. One should perhaps be more wary of these non-specialists who, despite having more kudos than your average IFA, probably have much less expertise in personal finance.
While they do not want to get into trouble with their respective regulatory bodies, experience shows that they would have to do something serious to be disbarred.
Ask them the same Questions to ask your IFA.
Some of the larger firms have their own dedicated IFA’s who are likely to be of a high standard and would usually work on a fee basis and therefore unlikely to be “commission driven”.
Also sell investment products to the wealthier.
They started to be regulated by the FCA from around summer 2000.
You’d pay a fee – the cheapest at present are around £99 – but you must make sure that there aren’t further charges e.g. the pension provider may charge commission, as if it had been through a salesperson, but which it keeps as pure profit.
You’d also need to be clear on what the future / ongoing charges will be.
Besides the need for detailed research (which you really should do before taking this route), the major disadvantage is that because you chose the pension yourself, you’ve nobody to blame and will be highly unlikely to be able to claim any compensation later on. (Unless the pension provider went out of business, where you’d be covered by the Policy Holders Protection Act).