You often hear the term ‘financial adviser’, meaning a finance professional who will design an investment plan for you and recommend specific investment products. It’s also a loose term – there are different types of financial advisers which sit under that banner of ‘financial adviser’. Let’s meet them.
What are the different types of financial advisers
The independent financial adviser
Independent financial advisers are the headline providers of financial advice in the UK.
Independent financial advisers, known as IFAs for short, are the obvious choice for the highest quality financial advice. This is because:
- They meet minimum education and qualification requirements, which were increased in 2010
- They are impartial. Because they receive their fees directly from you, this allows them to create a plan which is in your best interest
- They are regulated by the Financial Conduct Authority, meaning they are subject to regulatory oversight, and you also have a right of recourse if something goes wrong. You can raise a complaint to the Financial Ombudsman if you feel that you have been mistreated.
These factors are not all present in other types of financial advisers, which is why IFAs remain the first choice for advice providers to people with over £50,000 to invest.
Are there any drawbacks to independent financial advisers? Not really – all I would add is that the regulatory regime and the independence does come at a cost. You get what you pay for, which means that if you hoped to be able to pick up some quick advice for a £89 session you are sadly mistaken. Advice fees start at around £500 and increase with the size of your portfolio.
Restricted advisers are usually employed by a company which provides financial services, or their employer is closely connected with a group of financial service providers. This is one of the different types of financial advisers that you need to be wary of.
What makes a restricted adviser different from an IFA is that they will not search the ‘whole of market’ for your options. For example, imagine an investment advisor which only recommends funds of a single brand, or a mortgage adviser who is restricted to only a couple of banks.
‘What is the point of a restricted adviser?’ you may be asking. ‘This sounds like a downgrade from an IFA, won’t a restricted adviser make a suboptimal choice if they don’t make recommendations from the full range of products available?
Well, the answer is rather bluntly, yes they do offer a sub-optimal service. However, the service will generally be cheaper (as the adviser’s firm will be remunerated by its arrangements with the product providers), therefore you won’t have to pay an upfront fee of £500. The advice itself might be technically free.
Now, this may not be as useful as an IFA starting from a blank piece of paper, but this can still lead to a more educated purchasing decision than looking for yourself. For example, a restricted adviser will still have powerful comparison tools at their disposal, and may have several insights to share on the relevant product marketplace.
So in a sense, yes, restricted advisers are slightly compromised as a result of their product limitations, however there’s certainly a place for them in the financial services market, particularly at the lower end where it wouldn’t make economical sense for someone to pay upwards of £500 for independent advice.
The ‘not a financial adviser’ advisers
This final category covers those talking heads, authors, journalists and websites (such as Financial Expert) which provide information and guidance about buying shares and investing.
In layman’s terms, this could be described as ‘advice’. But in a legal sense, this is financial journalism and is not professional advice. Authors of financial content are not regulated by the FCA, and clearly do not understand your personal circumstances.
As a result, you may not ‘rely’ upon the advice of authors and so on. What do I mean by this?
Well, if you were to base a financial decision purely on the information contained within an article posted online, you would have no right to compensation if you subsequently made a loss. In other words, the author has no duty of care to you.
Of course, nobody should be sharing misleading, irresponsible or incorrect information online. But at the same time, an author can never control how people will interpret or act upon the information they share. Furthermore, they often receive no money directly from the individuals who read the content. Therefore, it would be unfair to hold this type of author to account through the courts, for them posting an opinion which subsequently turned out to be unhelpful.
All of this means that as a new investor, you should be always careful when performing online research. Try to corroborate facts and ideas through different sources, and only make an investment when you have satisfied yourself that this is the sensible thing to do.
Never invest just because a pundit said that they were going to. Never sell just because a news website has painted a gloomy picture of the coming year. You need to whole yourself to account for your own decision making.