The following article mainly relates to the UK. Depending on the exact regulation in your country, the terms used to described advisors may differ slightly. If you’re unsure whether you need a financial advisor, read ‘Do You Need a Financial Advisor?‘. This article looks at advising from a client point-of-view, however if you’re thinking of advising as a career, see ‘How to Become a Financial Advisor‘.
There are 4 categories of financial advisor: Tied, Multi-tied, Whole-Of-Market and Independent Financial Advisor (IFA).
Tied advisors are ‘tied’ to one particular product provider, and can only recommend products offered by that sponsor. If the advisor believes their provider doesn’t offer an appropriate product for the customer, they must admit this is the case, and direct the customer to an IFA. Tied advisors are either employees of the product provider, or an employee of a smaller company that specialises in the provider’s products.
Multi-tied advisors have a wider remit, and can offer products from multiple providers with which they have an agreement. A common form of multi-tie is where the advisor has a different provider for each type of product. For instance, for insurance products, they are tied to a single insurer, and for investments they are tied to a single investment provider. All types of tied advisors usually receive remuneration in the form of commissions from the provider. However, their individual employer may still offer them a salary package that incorporates elements of flat-rate and commission.
A whole of market advisor must research the entire market before recommending a product to their client. This means a whole-of-market advisor has a duty to recommend the ‘optimal’ product for the clients situation, whereas a tied advisor may only recommend the ‘most suitable’ from their limited range. This difference is demonstrated by walking into a BMW showroom and asking for a car that meets your needs. The BMW salesman (tied advisor) will recommend you the most suitable BMW, however a whole-of-market advisor may recommend a much cheaper car from another manufacturer which is far more affordable. Whole-of-market advisors also receive remuneration through commissions from the providers.
An independent financial advisor (IFA) has the duty to research the whole market, but crucially they must also offer you the opportunity to pay a flat fee for their advice. An IFA is the only type of advisor that must offer this ‘fee-only’ option to their clientele. All financial advisors are required to act in an ethical and professional manner, however commission-based advisors will always have an incentive to recommend products that pay them large commissions (and will carry high entry and annual charges as a result). Therefore the only truely independent advisors are those who charge a flat fee to the client.
Which Advisor Type is Best?
While it is clear that the independent financial advisors will produce the advice that is in your better interest, they may be too expensive. You often get what you pay for in financial advice. If you only have £5,000 to invest, then an IFA won’t be appropriate, because their fees will dig too deeply into your capital. However tied-advisors are usually part of more efficient and leaner companies, and are usually willing to accept smaller investments, even if they will only earn a maximum of 3% commission = £150 for their efforts. They can do so because tied advisors only advise on a limit number of products and therefore need less training and experience and don’t need to undertake market research, meaning the cost of providing the advice is lower. You get what you pay for when it comes to professional advice, however even tied advice is better than no investing advice, as the product recommended will at least be suitable, unlike the investing mistakes made by beginners who decide to go it alone.