Independent Financial Advisers or
IFAs are
professionalA professional is a member of a vocation founded upon specialised educational training.The word professional traditionally means a person who has obtained a degree in a professional field...
s who offer independent
adviceFinancial advice is advice given in relation to financial matters such as investing, insurance, borrowing, saving and retirement planning. Professionally, the advice is given only after the financial situation of the client is unveiled through a thorough fact-finding and analysis exercise...
on
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matters to their clients and recommend suitable financial products from the
whole of the market. The term was developed to reflect a UK regulatory position and has a specific UK meaning, although it has been adopted in other parts of the world, such as
Hong KongHong Kong , officially the Hong Kong Special Administrative Region, is a highly autonomous territory of the People's Republic of China, facing Guangdong to the north and the South China Sea to the east, west and south...
.
The term "Independent Financial Adviser" was coined to describe the advisers working independently for their clients rather than representing an
insuranceInsurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known...
company, bank or
bancassurerThe Bank Insurance Model , also sometimes known as Bancassurance, is the term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products.BIM allows the insurance company to...
. At the time (1988) the
UKThe United Kingdom of Great Britain and Northern Ireland is a sovereign state located off the northwestern coast of continental Europe. It is an island country, spanning an archipelago including Great Britain, the northeastern part of Ireland, and many small islands...
government was introducing the polarisation regime which forced advisers to either be tied to a single insurer or product provider or to be an
independent practitioner. The term is commonly used in the
United KingdomThe United Kingdom of Great Britain and Northern Ireland is a sovereign state located off the northwestern coast of continental Europe. It is an island country, spanning an archipelago including Great Britain, the northeastern part of Ireland, and many small islands...
where IFAs are regulated by the
Financial Services AuthorityThe Financial Services Authority is an independent non-governmental body, quasi-judicial body and a company limited by guarantee that regulates the financial services industry in the United Kingdom. Its board is appointed by the Treasury. Its main office is based in Canary Wharf, London, with...
(FSA) and must meet strict qualification and competence requirements.
In the UK the industry has been de-polarised since 2005. There are now three main classes of adviser: tied advisers (working for one financial institution), multi-tied advisers (offering products from a selection of the market and usually paid on a
commissionThe payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
basis) and independent financial advisers. Independent financial advisers must offer their clients the option to pay for advice by fee as an alternative to commission.
Typically an Independent Financial Adviser will conduct a detailed survey of their client’s financial position, preferences and objectives; this is sometimes known as a ‘factfind’. They will then advise appropriate action to meet the client's objectives; and if necessary recommend a suitable financial product to match the client’s needs.
Individuals and businesses consult IFAs on many matters including
investmentInvestment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. Investing is the active redirection of resources: from being consumed today, to creating benefits in the future; the use of assets to...
,
retirement planningIn general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. It is a tax deferred savings vehicle that allows for the tax-free accumulation of a fund for later use as a retirement income...
,
insuranceInsurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known...
, protection and
mortgageA mortgage is the transfer of an interest in property to a lender as a security for a debt - usually a loan of money. While a mortgage in itself is not a debt, it is the lender's security for a debt...
s (or other
loanA loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
s). IFAs also advise on some
taxTo tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law.Taxes are also imposed by many subnational entities...
and legal matters.
Paying for advice
Traditionally IFAs have relied upon commission paid by product providers to pay for their services. In recent years there has been a shift towards
feeA fee is the price one pays as remuneration for services, especially the honorarium paid to a doctor, lawyer, consultant, or other member of a learned profession...
based advice as this is perceived as fairer toward the client. However, due to under-capitalisation in the advice sector and consumer reluctance to pay for something they perceived as getting for free, the transition to fee based advice has been slow and concentrated in the 'high net worth sector'.
To encourage client's awareness of the cost of advice, and to stimulate a market in advice, the
FSAThe Financial Services Authority is an independent non-governmental body, quasi-judicial body and a company limited by guarantee that regulates the financial services industry in the United Kingdom. Its board is appointed by the Treasury. Its main office is based in Canary Wharf, London, with...
has introduced a new disclosure regime for advisers giving regulated investment advice. Since July 2005 this regime insists that advisers who market themselves as
independent must offer the option of paying a fee for advice. The three main remuneration options available are as follows:
- Commission: Traditionally the most common way to pay for advice is for the IFA to receive a commission from the product provider. The amount of commission must be disclosed, and some IFAs will rebate a portion of their commission, particularly in Execution-Only cases. The amount of commission and whether it is deducted from the amount you actually invest or is included in the cost of the investment varies from product to product. The client pays for commission from product charges so it does not represent 'free advice'. As well as the initial commission, the adviser is likely to be also paid an annual "trail" commission by the product provider. Not all products offer the same rate of trail commission and therefore a potential conflict of interest may arise. The products making the highest management charges usually offer the adviser the highest trail commission.
- Fees: Less common than commission, all IFAs must offer the option of working for a fee. Depending on the size and type of the investment, and the complexity of the advice, this can work out cheaper than paying commission. Paying a fee for advice is the best way to ensure that the advice is impartial and there is no incentive for the IFA to recommend a product solution.
- Combination: It is also possible to pay a combination of fees and commission. In this situation the IFA will rebate a proportion of the commission they would have been due in a commission-only scenario.
There are strict requirements for the type and amount of payments to IFAs to be clearly disclosed, so it would normally be quite easy to determine the cheapest option for a particular investment.
Qualifications
To offer financial advice an individual must represent or be an appointed representative of a firm
registered with the
Financial Services AuthorityThe Financial Services Authority is an independent non-governmental body, quasi-judicial body and a company limited by guarantee that regulates the financial services industry in the United Kingdom. Its board is appointed by the Treasury. Its main office is based in Canary Wharf, London, with...
(FSA). The FSA require that firms ensure that individuals acting for them have
appropriate qualifications. The list of appropriate qualifications is determined by the
Financial Services Skills Council at the behest of the FSA.
The qualifications for most firms relate to
Chartered Insurance InstituteThe Chartered Insurance Institute is a United Kingdom based professional organisation for those working in the insurance and financial services industry....
(CII) exams past and present.
The entry level is normally the historic 'Financial Planning Certificate' (FPC), or its successor, the 'Certificate in Financial Planning' (CFP) which includes an additional examination focusing on investment advice and risk. For the payment of a fee to the
Personal Finance SocietyThe Personal Finance Society is a British professional organisation of individual financial advisors and those in related roles.The Society was formed in January 2005, from the merger of the Life Insurance Association with The Society of Financial Advisors. It is part of The Chartered Insurance...
members with this level of qualification may use the CertPFS designation. The exams to achieve this are certificate level as designated by the
Qualifications and Curriculum Authority (QCA) each exam is approximately equivalent to a GCSE (five for CFP and three for FPC).
The next level is the historical 'Advanced Financial Planning Certificate' (AFPC) and newer 'Diploma in Financial Planning' (DFP). Again for a fee members of the Personal Finance Society may use the designation DipPFS.
The next level is 'Advanced Diploma in Financial Planning'.
The highest level is '
Certified Financial PlannerThe Certified Financial Planner designation is a professional certification mark for financial planners conferred by the Certified Financial Planner Board of Standards in the United States, Financial Planners Standards Council in Canada and 18 other organizations affiliated with Financial Planning...
' (CFP) issued by the Institute of Financial Planning or Chartered Financial Planner status recently introduced by the CII.
All IFAs also have an obligation to keep up with current developments in the profession, sometimes referred to as Continuous Professional Development. There are many advanced and more specialised qualifications an IFA may take throughout their career, and it can be worth asking about an adviser’s specific areas of expertise.
While the CertPFS qualifications are the minimum requirements, it is likely that an adviser will progress to the more advanced qualifications throughout their career. With the introduction of higher qualifications becoming more important, the level of qualification can therefore be a useful indicator of an adviser's expertise, although a great deal of experienced advisers currently offer a greater deal of practical knowledge than those obtaining qualifications rapidly in a corporate training ground.
If things go wrong
Financial services Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock...
are heavily regulated in the
United KingdomThe United Kingdom of Great Britain and Northern Ireland is a sovereign state located off the northwestern coast of continental Europe. It is an island country, spanning an archipelago including Great Britain, the northeastern part of Ireland, and many small islands...
. While this may in some cases restrict the market and places a heavy burden on financial services professionals, it also makes for one of the safest consumer markets in the world.
If a client buys a financial product on the advice of an IFA which turns out to be unsuitable, they have the right to complain and, if the complaint is upheld, may receive compensation. All regulated financial services companies, including IFAs must have effective internal complaint handling procedures. If a complaint is not dealt with satisfactorily internally, the client has the option of going to the
Financial Ombudsman ServiceThe United Kingdom's Financial Ombudsman Service is an ombudsman established in 2001 as a result of the Financial Services and Markets Act 2000 to help settle disputes between consumers and UK-based businesses providing financial services, such as banks, building societies, insurance companies,...
, which will conduct an independent investigation and has the power to award compensation if warranted. It should be noted that in a large majority of cases referred to the Ombudsman, it finds that the firm had treated the customer’s complaint fairly.
This does not mean that a client can claim compensation simply because an investment loses money. With all investments, there is an element of risk, the basis for complaint would only be whether or not that level of risk was unsuitable for a particular client based on the information given to the adviser. This is particularly important (and not well-understood in the public consciousness), and especially in relation to the sale of with profits endowments intended to be used to repay an interest only mortgage. A great many people saw strongly reduced investment returns from their endowments due to lower interest rates (and hence investment returns) and subsequently claimed that they had been mis-sold. While the poor performance is regrettable, it in no way constitutes mis-selling in the legal sense unless it can be shown that the endowment was unsuitable for the client's needs at the time it was advised. It is not possible to use retrospective judgements to assess decisions made in good faith in the past either.
Execution-only
In some circumstances an IFA will arrange a financial product to a client without providing them advice. This is known as an execution-only service, and is often accompanied by a partial rebate of commission paid by the product provider. This form of sale can be useful when the client does not require advice, as they can often get better value by going through an IFA than if they went directly to the product provider. It can have problems however, since no advice is given, the client has no redress if they subsequently find the product to be unsuitable for them. This has formed the basis of several ‘mis-selling’ claims for certain classes of product.
Depolarisation
On 1 December 2004 the
Financial Services AuthorityThe Financial Services Authority is an independent non-governmental body, quasi-judicial body and a company limited by guarantee that regulates the financial services industry in the United Kingdom. Its board is appointed by the Treasury. Its main office is based in Canary Wharf, London, with...
(FSA), the UK financial regulator, changed the rules governing financial advisers. Previously (under a system known as ‘Polarisation’) there were only two types of financial adviser, those who would advise and sell only one company’s products - known as a Tied Agent, and those who would advise and sell the most suitable products from the whole of the market – Independent Financial Advisers (IFA).
With Depolarisation, the FSA has changed this dramatically. A firm may now offer advice on products from just one provider (single tied), more than one provider (multi-tied) or from the entire marketplace (whole-of-market). Generally speaking, to be able to call itself "independent", a firm must offer its clients the option of paying for the advice by a fee and must be a whole of market adviser.
There are a few complications however :
- A firm may hold themselves out as being whole of market for one class of product such as investments, but be multi-tied on another, for example pensions.
- An adviser can start a relationship with a client as a single tied adviser, but can then broaden the scope of advice to multi-tie or whole of market advice (he cannot decrease the scope of advice he offers though). If he does this he must re-disclose his status to the client.
The regulations that introduced regulation for mortgages and general insurance (GI) were developed and introduced around the same time as the depolarisation rules (Mortgages 31 Oct 04, GI 14 Jan 05).
Look out for the adviser's regulatory documents; the 'Terms of Business Letter' , 'Keyfacts About Our Services' and 'Keyfacts About The Cost of Our Services'. These are very important and will clarify the nature of their status and commercial relationship with you. If you have agreed to remunerate the firm by fees, they will also normally clarify this by issuing a fee agreement letter.
These documents may also compare your adviser's charges (including commission) with those of other firms in the market. The data that the FSA collates to allow firms to create these figures has been subject to criticism. The FSA sources this data from life offices. The process that it uses to do this is new and no doubt will be refined with time.
Industry
The industry is served by a number of periodicals, including the weekly publication Money Marketing.
See also
- Financial advice
Financial advice is advice given in relation to financial matters such as investing, insurance, borrowing, saving and retirement planning. Professionally, the advice is given only after the financial situation of the client is unveiled through a thorough fact-finding and analysis exercise...
- Financial adviser
A financial adviser is a professional who renders investment advice and financial planning services to individuals and businesses. Ideally, the financial advisor helps the client maintain the desired balance of investment income, capital gains, and acceptable level of risk by using proper asset...
s
- Financial Planner and Financial Planning
A financial planner or personal financial planner is a practicing professional who helps people deal with various personal financial issues through proper planning, which includes but is not limited to these major areas: cash flow management, education planning, retirement planning, investment...
- UK Pension Provision
UK Pension Provision falls into seven major divisions; Basic State Pension, State Second Pension , Occupational Pensions, Stakeholder Pensions, Group Personal Pensions and Personal or Individual Pensions...
- Self-invested personal pension
A Self-Invested Personal Pension is the name given the type of UK government approved personal pension scheme, which allows individuals to make their own investment decisions from the full range of HM Revenue & Customs approved investments....
s
- Collective investment scheme
A collective investment scheme is a way of investing money with others to participate in a wider range of investments than feasible for most individual investors, and to share the costs and benefits of doing so....
s
External links