Independent Financial Advisers or IFAs
What is an IFA?
Independent Financial Advisers or IFAs are professionals who offer independent advice on financial matters to their clients and recommend suitable financial products from the whole of the market (which means they are not connected to one particular product provider). 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 Kong.
The term “Independent Financial Adviser” was coined to describe the advisers working independently for their clients rather than representing an insurance company, bank or bancassurer. At the time (1988) the UK 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 Kingdom where IFAs are regulated by the Financial Services Authority (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 commission 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 investment, retirement planning, insurance, protection and mortgages (or other loans). IFAs also advise on some tax and legal matters.
Choosing an IFA
While it’s not foolproof, the best way to ensure decent advice is to establish credentials and qualifications. This may not find you the best IFA, but it should help weed out the worst.
Top questions to ask ‘em
- How long have you been established?Look for an IFA business that’s been established for at least three years.
- Are you authorised?The Financial Services Authority monitors firms to check they are qualified and above board. Before you meet any IFA, do a quick search on the FSA’s website to check they’re fully authorised.
- What qualifications do you have?The Financial Services Authority, requires all IFAs to pass the three basic exams to get the Certificate in Financial Planning (CFP) (formerly known as the Financial Planning Certificate (FPC)). As they all have do this, you want to look for additional qualifications.A Diploma in Financial Planning (DFP) (formerly the Advanced Financial Planning Certificate (AFPC)), or even better, the Advanced Diploma in Financial Planning (ADFP), should be your desired qualification.To get this, the IFA has to sit advanced exams. They can choose which subjects to specialise in, such as pensions and investment, though the taxation qualification is compulsory. An adviser that has completed some, but not all, exams is still a reasonable way up the pecking order.The top qualifications IFAs can get is Certified Financial Planner or Chartered Financial Planner, which put them up there with accountants.
- Can I see your Keyfacts documents?Ask to take a look at their ‘Keyfacts’ document, which will list all their charges and confirm they are truly independent.
Fee’s and Charges
- Fees. Here they charge a flat hourly fee for their advice. Standard fees range from £75 to £250 per hour depending on your area and what kind of advice you need. Make sure you ask in advance and compare costs.The great advantage of fees-based advice is there’s less incentive for advisers to skew their advice according to how much commission they’ll make, as they should pay any commission earned back to you, either in the form of a rebate or a boost to any plan. Always ask and check this is happening.Plus if you’re making a large investment or pension, then you’re definitely better off paying a fixed fee rather than commission, as commission increases with the size of the investment.
- Commission. Advisers paid commission may seem to be giving advice for free, but over the long run they tend to make more money this way than by charging a fee upfront. Some plans can be extremely profitable and will make advisers a large amount of money. As an example, a typical upfront commission paid on a £30 a month level term life assurance policy for 25 years would be £600.The proof that commission impacts advice is that companies deliberately market increased commission rates to IFAs. If advice was never biased, then the rate of commission wouldn’t make any difference, yet product providers know if they up the commission rate, they’ll be more frequently recommended.However the commission route still has its merits. While there will be some bias, the legal obligation to give good advice means advisers tend to tweak at the fringes rather than give downright poor information. And the big advantage is that as you won’t need to stump up the cash each time, you’ll be less scared to seek help when needed, so you’ll continue to get retained advice.