If you are considering taking financial advice for the first time you may feel like you are taking a step into the unknown. It may be that you have recently bought a house, married or started a family, which are often triggers for seeking financial advice, but whatever your personal situation it’s important to be able to choose the right service for you. On the other hand, if you are revisiting a financial adviser that you have an existing relationship with, it is always worth checking that they still have the same status and a charging structure that suits you.
New rules about the way financial advice is given and paid for came into effect on June 1st 2005. One of the main benefits of this change to financial advice is that it is now easier for people to shop around for financial products and assess whether their financial adviser is providing value for money.
This is due to the fact that under these new rules anyone who visits a financial adviser will get essential “key facts” information up front which sets out the status of that adviser and their costs. However these documents can only really be used to your advantage if read carefully and understood. This factsheet explains what each document includes, what it means to you and how it can help you get the right advice that will be most valuable to you.
When you visit a financial adviser you should be given two documents which contain some extremely important information. Both documents will display the Financial Services Authority (FSA) “key facts” logo.
These 'key facts' documents are entitled:
Essentially these documents will give you at your first meeting clear information about the type of advice and level of service being provided by the adviser and how much it will cost. It is then possible to use this information to shop around and choose the level of service you want and the firm you want to deal with from a more informed standpoint.
This document explains how firms are regulated by the FSA, the range of products they are authorised to advise on and sell and contains information they are required to give you.
It looks at the type of products the firm offers such as pensions, investments, protection, mortgages and insurance.
The document explains whether the firm offers products from the whole of the market, a limited number of companies in the market or just one company or group of companies.
Independent Financial Advisers (IFAs) offer advice on products from the whole of the marketplace and also have to provide the option of paying by a fee.
All IFAs must be authorised and regulated by the FSA and are obliged to offer what is termed 'suitable advice'. This means that they have to gain a full understanding of your circumstances and requirements before helping to choose any financial products.
Other advisers might be “tied” – either to a single provider or “multi-tied” to a limited number of providers. An adviser tied to a single company can only advise on and recommend products from that company; while a multi-tied adviser can offer a choice of products from a limited range of companies they have selected.
The “About our services” key facts document also explains the services the firm will provide for certain types of financial products. Broadly speaking, the services fall into two main categories.
Firms offering this level of service will ask you a number of questions to assess your circumstances, gather and analyse personal information about you, your finances, your needs and objectives. Once they have done this they will recommend and discuss any action they think you should take and, with your agreement, arrange the relevant financial products for you.
You will not receive advice or a recommendation from the adviser. They may ask some questions to narrow down the selection of products that they will provide details on. You will then need to make your own choice about how to proceed and which product you will buy.
The “About our services” key facts document also details what people should do if the need to make a complaint against the company arises. It should explain whether products sold by the firm are covered by the Financial Services Compensation Scheme and, if so, the maximum amount of compensation payable for each product type.
The firm is required to present you with a document detailing the cost of its services before doing business with you. This will again display the FSA “key facts” logo and explain how the firm gets paid.
all firms charge for advice in the same way. Your adviser should discuss the payment options open to you and answer any questions you have. They will not charge you anything until you have agreed how they are to be paid.
The “About the cost of our services” document will explain whether you can choose between paying the firm by
It will also include examples and market averages of what each option could involve paying. Some firms will offer all three payment options, while others may offer only one or two.
The new rules mean that all IFAs are required to offer customers a fee-payment option, other advisers are not required to give you this option although some may choose to. Paying by fee means whether you buy a product or not, you will pay the adviser a fee for their advice and services. If they also receive commission from the product provider when you buy a product, they will pass on the full value of that commission to you in one or more ways. For example, the adviser could reduce his or her fee; or increase your investment amount; or refund the commission to you.
If you buy a financial product, your adviser will normally receive commission on the sale from the product provider. Although you pay nothing up front, that does not mean the service is free. You still pay the adviser indirectly through commission. If you buy direct, the product charges could be the same as buying through an adviser, or they could be higher or lower. Your adviser will tell you how much the commission will be before you select a financial product.
In some circumstances, advisers may offset the fee against any commission they might receive. Typically this is where an hourly or fixed rate is agreed up front and any commission received for products bought will be used to reduce the fee, or increase the amount invested, or be refunded to you.
Within a firm of advisers you might be offered different payment options for different products. For example, with an investment product the adviser might be paid by commission from the product provider alone, but if you arranged a mortgage through the same firm you might have to pay a fee combined with the adviser receiving commission from the mortgage lender.
Whichever payment option you opt for, the “About the cost of our services” key facts document will give you an idea of what you will be paying.
If you choose the fee option, the adviser will agree the rate they will charge before beginning work and also tell you if you have to pay VAT. Typical charges for a financial adviser range between £75 to £250 per hour.
You can ask the adviser for an estimate of how much in total they might charge and also ask them not to exceed a given amount without checking with you first.
For lump sum investments advisers might charge a flat rate percentage of the sum invested and for ongoing advice each year an additional charge as a percentage of the value of your investment portfolio.
If you opt to pay by commission, the key facts document will include a menu of commission rates, providing a benchmark showing the average cost of advice in the industry. These are often shown as tables showing the amount of commission the adviser will receive for certain products, alongside the market average. This way you can decide whether your adviser is providing value for money compared to other advisers.
The amount of commission varies according to the type of product, the amount you invest and sometimes the terms of the product. The key facts document should contain examples to make everything as clear and simple as possible.
When a financial adviser recommends a product you may be given other documents such as “key facts” document for the recommended product. This should outline the costs, benefits and risks of the product. If you have any questions about the recommendation it is important to ask your adviser before investing your money.
As you can see it is definitely in your interest to get your ‘key facts’ straight when speaking to financial advisers, deciding who you should be dealing with and how you wish to pay for your financial advice. Educating yourself by taking the time to read these documents carefully and making sure you understand what they mean can only be beneficial to your own financial situation.
To help you arrive at the best route for your financial advice needs you can use the decision tree below:
A person authorised and regulated by the Financial Services Authority (FSA) has approved this fact sheet. Rossmore Financial Services takes no responsibility for any action, which an investor takes, based on this information.
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