6 Things to consider when seeking Financial Advice
Industry Research highlighting the benefit of advice when taking major financial decisions shows that those who take advice are likely to accumulate more wealth, supported by increased saving and investing in equity assets, while those in retirement are likely to have more income, particularly at older ages.
One study highlighted that receiving professional financial advice over a five-year period*, resulted in a total boost to wealth (in pensions and financial assets) of £47,706 in a decade**. Evidence suggests that fostering an ongoing relationship with an adviser leads to better financial outcomes. Those who reported receiving advice at both time points in the analysis had nearly 50% higher average pension wealth than those who only received advice at the start**.
The investment manager Vanguard estimates that advisers can add up to 3% in additional returns per annum*** via strategies such as behavioural coaching, tax efficiency & investment monitoring/rebalancing.
That said, we at Falco believe that all advice is not created equal, and the following points are worth considering if you are looking for advice.
Is the advice independent?
This is possibly the most important consideration. Many advisers are not independent, and in our opinion when advisers aren’t independent there are often compromises & conflicts of interest at play. The obvious fact is that tied/restricted advisers are only able to recommend certain products, and these may not represent the best that the whole of the market has to offer. An independent adviser is obliged to carry out whole of market research.
Independent advisers generally aren’t any dearer than restricted ones (and are often a lot cheaper - see examples in charges section below) so there are no real downsides to picking an independent adviser.
An example of a less obvious conflict of interest: many large restricted advice franchises offer to pay retiring advisers within their franchise approximately double the going rate to buy their client bank upon retirement, this generosity is ultimately financed by higher fund or advice charges which negatively impact investment performance for their clients. Thus beware if your long standing IFA suddenly tells you they are moving to a restricted practice and that your investment fees will be going up as a result. They will often be doing this for their own ends as an exit strategy from the industry, be mindful of such incentives. Don’t let their retirement impact negatively on yours.
It’s worth checking a prospective adviser’s website and disclosure documentation to see whether they have the word “independent” on it. It’s easier for an adviser to fib or talk around their independent/restricted status verbally, but their website and paperwork are less likely to misrepresent as restricted advisers would be wary of the regulator seeing their website. Falco are independent and will seek to remain so indefinitely.
Qualifications
The standard popular qualification for an IFA is a Diploma in Regulated Financial Planning granted by the Personal Finance Society* which gives advisers the letters DipPFS after their name. This is a fairly basic qualification, most of the exams are multiple choice. There is no minimum experience needed to gain that qualification.
If an adviser is Chartered this signifies that they have passed a number of higher level exams, also an adviser must have at least 5 years’ experience to be Chartered. Whilst higher qualifications and experience are not a guarantee of better advice it is Falco’s belief that on average advice would be better from someone who is more qualified and more experienced. Matthew Bird at Falco is Chartered. *NB There are equivalent qualifications from other bodies but the PFS qualifications are the most common.
Charges
Once it has been established that advisers are independent and appropriately qualified, cost is the next thing to look at.
Financial Services is a unique industry in that paying more usually doesn’t get you a superior product or service. If you pay more for a car, you usually get a better one, the same goes for most of the things we buy in life: mobile phones, TVs, a meal in a restaurant etc. But with Financial Services because clients are not well placed to judge the quality of advice or investment products, the industry appears to get away with high charges for average or substandard products and services.
With investments the term “you get what you pay for” is not necessarily accurate. “You get what you don’t pay for” is nearer the truth as higher costs almost always lead to reduced performance. Costs should be kept as low as possible without compromising on points one and two. Most advisers charge a percentage-based fee structure. Some now charge fixed charges. Compare a few advisers and work out the fees in pounds and pence.
Falco believe our fee structure to be very competitive especially on larger portfolios (£300,000.00+) when fund and platform charges are taken into account. We are generally cheaper than most of the big advice franchises in the UK.
According to the website (July 25, 2023) these these are the average ongoing charges of some of the UK’s largest advice franchises -
Financial advisor Fee (average % over 10 years)
St James’s Place ISA - 2.15%
St James’s Place pension - 1.92%
Quilter PrivateClientAdvisers - 2.27%
Rathbones - 2.40%
RBC Brewin Dolphin - 2.60%
Average independent advisor - 2.14%
Falco’s investment total costs depend to some extent on the amount invested but subject to our minimum investment size (£150,000) being met we are significantly cheaper than all of the above and in some cases with large investment amounts (£1,000,000+) we are less than 1% per annum including advice, investment and platform charges.
Cost savings compound over time, a 1% per annum saving doesn’t sound like much, but over several decades it makes a huge difference and could lead to a substantially larger pension pot at point of retirement.
Falco have seen no evidence that the investment strategies of the above institutions merit the additional fees that they levy, in fact the evidence demonstrates the contrary to be true, higher charges almost always guarantee poorer performance. You don’t want to pay 3 Michelin Star prices for pub grub!
As a side note, sometimes the additional cost of advice verses DIY investing can be negligible, especially if investors are using relatively expensive platforms and funds. Independent advisers can often shave off a few tenths of a percent of annual charges just by recommending a cheaper investment platform or cheaper funds which can offset some of the cost incurred of seeking professional advice. Falco spends hundreds of pounds a month on software packages that can filter and track investments as well as model your cashflow over time. When using a professional you could benefit from utilisation of these software products that could save you time and effort conducting your own research.
4. Client Feedback
If available, Google reviews (or reviews from other sources) are worth checking. Also upon request it may be possible to speak to an existing client of the firm to find out their experiences. At the time of writing (04/09/2023) Falco have 6 five star Google reviews.
5. Avoiding Scams
Independent Advisers should never ask you to pay investment money into their own bank account, this is a red flag, it should be paid to the third party being recommended which inevitably will be a large investment company that you will be able to research and check out yourself before making any payment. It should almost always be a UK based business. The only money that feasibly should be paid directly to an advice company is to settle their advice fees.
Check the adviser you are dealing with, and his/her business is registered on the FCA (Financial Conduct Authority) website, and that the adviser has an active FCA registration. Any advice given or product recommended should be regulated, if it isn’t regulated then it’s the Wild West and chances of restitution in the event of investment failure are lower.
“Guaranteed” high returns are another red flag, if it sounds too good to be true it probably is.
6. What Happens if a small independent adviser gets hit by a bus?
Most advisers will have a contingency plan to cover this eventuality. Advisers should have a locum agreement in place to cover off this risk. Ultimately client money is held with third party providers hence if the small advice firm fails for any reason their investment monies will still be safely invested with the providers recommended. Part of Falco’s advice process is to check the financial strength of the provider recommended. Advisers are regulated and insured so there is the possibility of restitution in the event of poor advice.
Falco Financial Planning has an agreement with Zensco Wealth Ltd that they will step in to monitor our client bank in the event that our director gets hit by a bus. If directors of both firms get hit by the same bus please use the above principles to choose another IFA.
*Between 2001 and 2006
** ILC, Revisiting the Value of Financial Advice,2019
***https://www.vanguard.co.uk/content/dam/intl/europe/documents/