In my guide on how to choose a financial advisor, the first question to ask yourself is what are your retirement goals, and how do you intend to reach them?
While the basic elements of saving and money management are easy to learn — save often, minimise debt, follow a tax planning strategy — the many details involved in making these choices can be more complex. As the number of financial products grows and you gain more options, it can be even more difficult and laborious to sort through all the available offerings and choose the ones that best suit your goals.
When your needs become more complex, you may benefit from the advice of a local independent financial advisor. But how do you choose the right professional in a sea of high-street, big bank, and boutique offerings?
My guide will walk you through the process of finding a financial advisor who can help you set, plan, and reach your financial goals. We’ll cover:
- How to spot the most experienced advisors
- How to decide what kind of advisor you need
- How to interview and hire the right financial advisor
What is a Financial Advisor?
A financial advisor is a specialist in managing money with the goal of creating a future income or growing a person’s wealth.
Each advisor’s role usually involves extensive product and investment knowledge as well as an understanding of how each product impacts their clients’ finances. However, some advisors will be specialists in specific products, such as pensions or private investment advice.
The average advisor is on hand to help their clients find and build an investment portfolio that works for their income level, their current savings, and their future goals and compares it with the market.
However, not all advisors are the same: they fall into one of two categories: independent and restricted. The vast majority of advisors are independent (83%) with a minority (15%) being restricted and a handful offering both services
What is an Independent Financial Adviser?
An independent financial advisor (or an IFA) has an obligation to research and provide advice on all investment products and providers, regardless of their personal preference (or in simple terms “independent financial advice”). Their advice must be unbiased and unrestricted, and they must present whatever options best fit the clients’ needs, regardless of whether the advisor stands to benefit from the product.
IFAs will advertise their services as independent, in part because it helps prospective clients make a decision and in part because every advisor must tell clients whether they are an independent or restricted financial advisor.
What is a Restricted Financial Advisor?
A restricted financial advisor only provides advice on specific products provided by a few companies. Like IFAs, they must tell you that they can only provide restricted advice, but a restricted advisor does not need to tell you what products they are restricted too.
Many of the best financial adviser firms like Hargreaves Lansdown and True Potential provide advisors who offer restricted advice. In the past, the advice provided by banks (before they disappeared from the sector) was also within the realm of restricted advice.
When an advisor is restricted, they can push their own investment funds or products without the obligation to show off other products. The option is neither good or bad: it’s only an option. The advisors earn more because both their advice and products bring in revenue, but they also need to clearly explain why their advice is restricted (as required by the FCA).
However, it’s worth noting that restricted advice is growing. In 2018, Lloyds Bank began working with Schroders (an asset manager) to create Schroders Personal Wealth, which aimed to hire and deploy 700 restricted advisors. Prudential also has a similar offering. Overall, the key players are facing stiffer competition. Though, it’s not clear whether or if there will be any impact on the market for IFAs.
When Should You Choose an IFA Over a Restricted Advisor?
On its face, choosing an IFA over a restricted advisor seems to make the most sense. Who doesn’t want to have as many options as possible?
Choosing an IFA does come with the benefit of being able to create a financial portfolio tailored to your unique life and financial circumstances. It can also be attractive to those who want to play a more significant role in building their own portfolio. However, IFAs typically also come with a higher cost, at least up front.
However, you shouldn’t discount all restricted advisors. While one restricted advisor may not offer the best package for you, another restricted advisor might. What’s more, they tend to be less expensive upfront because they have multiple ways of earning revenue. In other words, a restricted advisor can be a better opportunity if their product offers excellent value.
Whether you choose an IFA or a restricted advisor depends on your personal needs as well as your investment appetite. Either way, you should do plenty of research about the individual advisor, retailer, or firm before taking the plunge. You should start by looking out for advisors who provide explanations of their independent or restricted position (some less than scrupulous players may not, even though this is unethical and a violation of FCA guidelines).
You may also find the FCA’s checklist of differences between IFAs and restricted advisors helpful.
What Credentials Should You Look For in Advisor?
Although financial advisors increasingly have an undergraduate or graduate degree in accountancy or finance, not every advisor will, as hiring bodies won’t always demand it, particularly if the candidate shows a strong aptitude for finance.
However, to be a qualified financial advisor, each advisor must have specific Level 4 qualifications. These can include:
- SQA/Calibrand Diploma in Professional Financial Advice
- Chartered Institute for Securities & Investment – Investment Advice Diploma
- Chartered Banker Institute – Diploma in Professional Financial Advice
- Chartered InsuranceInstitute- Diploma in Regulated Financial Planning
- The London Institute of Banking & Finance – Diploma for Financial Advisors
Advisors who also provide advice on stocks and shares, long-term care protection, and mortgages and equity will also need to pass examinations in these areas.
If the advisor works in a retail setting, then they must be able to provide their Statement of Professional Standing (SPS). The document serves as confirmation from the FCA that they completed a relevant Level 4 qualification.
What Signs of Expertise Should You Look For?
The credentials above are a minimum standard needed to practice as a financial advisor in the UK. However, if you’re looking for a very experienced advisor with specialist qualifications, then you will look beyond Level 4 qualifications.
The highest-level financial planning qualification in the UK is the Chartered Institute for Securities & Investment (CISI) Level 7 Diploma in Advanced Financial Planning. Previously, the highest qualification was a CISI Level 6 Certificate in Advanced Financial Planning.
Because it is a relatively new qualification, only a limited number of financial advisors will have it.
One reason to look for a Level 7 qualification is that the qualification along with 1-3 years of experience allows the advisor to eventually register as a Certified Financial Planner™.
However, it’s important to remember that qualifications aren’t everything. While they do represent the attainment of a standardised education, it’s also important that your financial advisor understands how to work with clients with finances like yours. Your advisor should provide customised advice based on your goals, and while education better improves your chances of finding a professional like this, it’s also essential to get to grips with the personality and the practice of the individual advisor before hiring them.
What’s the Difference Between a Certified Financial Planner and a Financial Advisor?
A Certified Financial Planner™, or CFP, is a financial advisor who has achieved an annual license that allows them to call themselves a CFP. The CFP certification is a license used both in the UK and around the world, and it’s regulated by the Financial Planning Standards Board (FBSP) in the United States.
When an advisor holds a CFP certification, it demonstrates a commitment to ethics, competence and professional practice.
To achieve the CFP license, the advisor needs to achieve the relevant financial advisor qualifications, join the Chartered Institute for Securities & Investment (CISI), and pass the CISI IntegrityMatters exam. All licenses need to be renewed annually and are partly subject to the advisor’s completion of 35 hours of continuing professional development each year.
Ultimately, if you choose an advisor with a current CFP license, you are choosing an advisor who:
- Commits themselves to the highest levels of learning in their field
- Willingly undertakes continuing education, including in ethics
- Meets the standardised credentials issued by an international governing body
What’s the Difference Between a Financial Advisor and a Wealth Manager?
Financial planning and wealth management are different services offered within financial advising.
The distinction is fairly simple: a wealth manager provides investment consulting, advanced planning, and relationship management services, usually to clients with £1 million or more in investments.
They use tools that a general financial planner won’t such as:
- Wealth enhancement
- Wealth protection
- Wealth transfer
- Charitable giving
A general financial planner may not have the expertise to navigate the kind of questions that wealth almost inevitably brings up. Additionally, wealth managers often work within a context that provides access to other relevant professionals, like estate-planning solicitors, accountants, and property and casualty experts, usually within the same firm.
Can you use a financial advisor to manage your wealth? Yes, but unless they have the relevant education, then you are unlikely to get the most for the fees you pay or grow your account balances the way you wish.
What Services Do Financial Advisors Offer?
The field of finance advice is a wide one that can encompass a huge range of advice including:
- General financial planning
- Retirement income products
- Investments (including shares)
Not every financial advisor offers the same services in part because as of January 2013, advisors require different qualification levels for different products.
Many financial advisors are keen to sign on clients looking for ongoing financial advice, so it’s helpful to keep this in mind as you seek out a potential advisor. If you’re looking for a single issue, like navigating a divorce, then you might look for a specialist who can give you advice for a short period or cover your basic financial needs.
What is General Financial Planning?
Many providers offer a service commonly referred to as general financial planning, but what does this service encompass?
General financial planning refers to a practice that helps clients better achieve their life-long financial goals while navigating all of life’s biggest milestones, from starting work to buying a first home to beginning a family to planning for financial security during your working life and after you retire.
As a result, general financial planning looks different for everyone. However, general financial planning can offer:
- Increased value of savings and investments
- Tax-efficient products and strategies to save more
- Protecting your income in the event of big life changes
- Planning for your legacy (including tax planning issues)
Who Should Use a Financial Advisor?
For many people, basic financial planning doesn’t require an advisor. If your goals are to pay off debt (including a mortgage), build a rainy day fund, and auto-enrol in your company pension, then you probably won’t benefit from paying for a financial advisor’s advice. Instead, you might benefit from free services provided by your employer, community debt counseling, or other independent advice.
When does a financial advisor become valuable?
Usually, those with significant earnings or large amounts of cash savings or significant portfolio holdings are those who benefit most from advice, if only because they stand to gain more from the paid advice and fees.
Some other scenarios when you might benefit from professional advice might include:
- Receiving an inheritance
- Getting divorced
- Having children
- Late-stage retirement planning (deciding when to drawdown, etc.)
Even if your finances might not change much, it’s worth seeking out advice in these circumstances if only because you won’t have experience to draw upon when making financial advice in these situations. Professional advice can help you better navigate these one-off or rare events.
When is DIY Financial Planning a Good Idea?
Do-it-yourself financial planning is perfectly possible in today’s world, and there are several UK platforms that allow it. But when it is a good idea?
You can go it alone if you’re competent in personal finance already, and ideally, you’ll also benefit from the use of spreadsheets. There are also plenty of financial planning calculators available online that can help you estimate how much you need to save and when. Unfortunately, most software that goes beyond basic budgeting and saving is proprietary and only available to certified planners.
Although most people who seek out the DIY option tend to be those with an existing interest in the financial markets, a DIY approach may also suit you if you want to save and invest, but you’re not interested in taking a hands-on approach with your products.
For example, today’s robo-advisors allow you to invest in products designed to provide long term returns at a low cost.
You do not need a financial planner to access these products. Several products also provide tax harvesting and rebalancing automatically, which you would usually rely on a professional to do on your behalf.
If you’re someone with a keen interest in finance and economics, then you can also set up trading accounts to help you grow your wealth, again at low cost.
However, what you save in the costs of ongoing financial advice you’ll spend on research, monitoring, and endless calculations. There is a cost-benefit analysis to be had before you decide to forgo professional advice.
What Should You Do Before Looking for a Financial Advisor?
Because so many firms want to sign-on long term customers, it’s important to understand whether you’re looking for simple advice or a more comprehensive service.
To do that, you need to begin to piece together your initial financial goals.
As noted earlier, the kinds of goals you bring to a financial planner are those typically for securing your income and growing your wealth. These generally don’t include paying off debt, building cash savings, or initiating the retirement savings process. Indeed, most of the advice services offered on these topics are free and available from community organisations.
Some examples of goals a financial advisor can help with include:
- Aiming to live off the interest generated by your investments during retirement
- Planning for early retirement (before you can drawdown employer and government pensions)
- Growing a lump sum of inherited or earned wealth
- Protecting wealth or investments
- Creating tax-efficient wealth and investments
These goals typically deliver the kind of return that makes professional advice both valuable and worthy of investment.
How to Choose a Financial Advisor
Today, access to financial advice is simpler and less expensive than ever, largely thanks to the internet. At the same, the huge number of options available to you means that making the decision is harder than ever. There are so many moving parts in today’s financial advice services that you’ll need to have a clear picture of what you expect from the service before you open any accounts and sign any contracts.
One of the biggest decisions you’ll need to make straight away is your preferred format for receiving advice. Today’s financial advisors can provide advice face-to-face, but you can also sign up for products that strictly offer phone advice or even solely online.
Do You Want Face-to-Face Advice?
Today, there is a range of services that allow you to create accounts that all but manage themselves. Even still, there is a market for financial advisors who provide advice in face-to-face meetings.
Choosing an advisor who provides this kind of service has several benefits. The first is that your financial advisor is more likely to get to know you and better understand your unique financial situation and goals. They’ll also be better able to provide a customised service that’s tailored to your real risk level (as demonstrated through your interactions) rather than the risk level suggested by a survey.
Providing financial advice in person can also help you better understand the processes involved, which you may find beneficial if you’re someone who has beginner-level knowledge of financial products and markets. Learning more about your plan can instill a greater sense of financial security as well as trust between your advisor and yourself.
Keep in mind that you may find that these advisors charge higher fees than remote advice. You need to work out whether the value added from the face-to-face interactions is worth the cost. For some, it will be, and for others, it will only detract from your earning potential.
Will a Robo-Advisor Suit Your Needs?
Robo-advisors are increasingly popular investment platforms now offered by both start-ups and large investment banks. But do robo-advisors replace the financial advisor?
The answer to this question is a resounding no.
Robo-advisors have a unique place within the financial planning and management sphere. Their place is valuable, and people at all stages of life can benefit from robo-advisor services.
While robo-advisors manage your investments through algorithms, robo-advisors do not offer financial advice or financial planning. All robo-advisors say so on their product page. They offer an opportunity to set up an investment account, but they do not and cannot provide the personalised advice offered via financial planning and advisors.
Should You Try an Online Financial Planning Service?
An online financial advisor differs from any kind of robo-advisor because these services still offer planning and personalised advice, which robo-advisors and similar platforms do not.
The online financial planning sector is still new, despite the use of apps and online dashboards being well established. However, the products are sophisticated.
How does an online financial advisor differ from a face-to-face relationship?
Most online financial advisors allow you to do things like:
- Develop budgets and savings plans through templates
- Analyse any debt and identify paydown options
- Log-in to check in on your accounts (without an appointment)
- Analyse your situation and use calculators and scenario generators
- Run reports more than once a quarter
The big benefit of using an online service is the access allowed. While an increasing number of financial advice firms do offer customer dashboards that allow much the same flexibility, they also cost more because they deliver face-to-face services that is inherently more customisable.
How Much Does a Financial Advisor Cost?
The cost of financial advice in the past previously locked many people who could have benefitted it from the market. Today, there are financial advisors for more budgets, but they still charge fees for their advice.
Financial advisors (and all related positions) charge for their services in several different ways. They may charge:
- Initial service fees
- Fixed service fees
- Hourly advice charges
- Percentage fees (ad valorem)
- Proportion of saved tax
- Commissions (on insurance products)
These professionals provide valuable and unique advice that’s customised to your situation, and they deserve compensation for it. At the same time, it’s important that you know exactly what fees they charge as well as when and why they charge them.
In most cases, a financial advisor will offer a complimentary introductory session. The session can be used to understand whether you’re in need of a financial advisor, what services you may need, and whether that particular advisor is the right fit for you. They should then offer you a list of fees for each of their services.
What’s the Difference Between Fee-Only and Fee-Based?
Most financial advisors use one of two fee structures. The first is fee-only, which means that they only accept fees from clients for their services. They don’t accept third-party commissions when they sell their products.
When an IFA is fee-based, they use client fees as a foundation for their practice but they also take commissions from third parties when they sell products.
Most fee-based IFAs are fiduciaries, which means that even if they accept commission, they must act in their clients’ best interest, even if that means giving up commissions.
Are Upfront Fees Better than Transactional Fees?
Some financial advisors find they scare off potential clients by charging up front fees for their advice over transactional fees or percentage fees. Their upfront fees are higher, but does that mean these advisors are therefore more expensive?
Charing fees in advance for advice is a legitimate way of doing business. While the sticker shock may bother some, there are some benefits to working this way for some clients. For example, an advisor who charges an hourly fee or a fixed advice fee rather than a transaction or product fee may feel less conflicted in their advice.
Additionally, your financial strategy may better benefit from those advice fees rather than fees based on a percentage of your capital. These fees eat up huge chunks of small investments, and even though they typically get lower as your accounts grow, the initial high fees on the first £50,000 to £1,000,000 in your account usually stay the same.
What Other Kinds of Fees Do Financial Advisors Charge?
Another type of fee that everyone should be aware of is the exit fee (sometimes called the termination fee).
The exit fee is usually a percentage of holdings or a portion of your annual fee. Advisors and firms charge this to recoup some losses as a result of clients switching advisors. (Switching advisors is not uncommon particularly if your financial circumstances change.) You could pay up to 6% in fees if you withdraw or move within a certain timeframe.
So, it’s important to know about any exit fees and read contracts carefully.
Can You Switch Financial Advisors?
Yes, you can switch financial advisors, just as you can switch product providers.
In some cases, switching financial advisors is simple. You notify your advisor of your intention, and they make the necessary preparations to hand your account over to your new provider.
As mentioned above, however, it’s worth noting that switching financial advisors may be expensive. You may need to pay the exit fee or termination fee if your current advisor has one.
Additionally, if you use a restricted financial advisor, you may find that your current products aren’t available from another advisor (usually at a different firm) or even from an IFA. In these cases, you will need to sell and then pay capital gains tax on any earnings before reinvesting it elsewhere. This can be particularly problematic if you are using a tax-wrapper product or you’re leaving an account with additional tax protections.
How Do You Know if You Should Change Financial Advisors?
The fees and potential tax implications should stop you from switching financial advisors on a whim. However, there are times where you might stay with your financial advisor long after your relationship is still beneficial to you.
When is it time to consider switching?
First, you might feel it’s time to find a new advisor if they’re not providing you the kind of advice you want or need. If your advisor doesn’t have time to answer small questions or they won’t help you on any issue that they can’t issue a fee for, then you have a right to seek out an advisor who will. The same is true if you have an advisor who doesn’t listen to your concerns or goals. Your advisor needs to take your wants seriously: it’s your future.
You may also consider switching when your financial situation changes. Marriages, divorces, kids, starting a business, and nearing retirement are big changes for most people, and your advisor’s advice should reflect that. If they’re stuck solely on building your account, then they aren’t preparing you for your future.
It’s also important to find a new advisor if your professional focuses too heavily on trading with seemingly little interest in the rest of your goals. Fee-based advisors make commissions, and by trading, they earn more money. Don’t be alarmed about trade calls in general, but if you are only getting calls about trading, then it may be time to go.
What Questions Should You Ask a Financial Advisor?
Before signing up for a financial advisor’s service, you should have plenty of questions for them.
Your questions should pertain both to industry best practices and your own financial goals, as noted above.
If you’re not sure where to start, consider asking these questions.
What is the account minimum?
Some financial advisors will only accept a minimum investment level to provide their services. You might think these advisors strictly work with wealthy clients, but some advisors set a minimum investment amount well below the wealth management threshold.
This is the first question you need to ask as it will decide whether you are a good fit.
What is their specialty?
Each advisor will have their own specialty, and if you are facing specific circumstances, then you’ll likely want to find a financial advisor who is well-versed in your financial circumstances. For example if you have pension questions and are also managing director of your own business, you would want an advisor comfortable with handling business clients
What is their fee structure?
You should have a clear understanding of their fee structures before you sign a contract. Keep all the fees in mind, including whether the company is fee-only or fee-based.
Fees don’t just cost you money: they can also impact your relationships, including whether the advisor provides advice within the context of their conflict of interest.
What are their qualifications?
All financial advisors must have Level 4 qualifications, but these are only the bare minimum. It’s worth asking whether they have or in the process of taking further qualifications. These will not only inform their competence and experience, but they will also impact what kind of advice they can give.
For example, an advisor needs specialist qualifications to aid in a pension transfer.
Do they have clients similar to you?
Although you’re looking for custom advice, you will want to work with an advisor who regularly works with clients in your position. This doesn’t just apply to wealth circumstances.
For example, if you’re a high earner who hopes to retire by 45, you want to work with a financial advisor who has only clients with the same goal, or better yet, has successfully helped other clients achieve that goal.
Do they offer ongoing advice?
Financial advisors increasingly like to provide ongoing financial advice as it supports their own business. Not all do, and sometimes those who do only want clients who want an ongoing relationship.
It’s important to be clear about what the financial advisor expects from the relationship and whether it meets your needs.
Guide to Choosing a Financial Advisor Summary
A financial advisor can help you make the most of every pound saved, and in the end, the right advisor can be the difference between reaching your financial goals or worrying about finding your feet in retirement.
Not everyone needs a financial advisor: if you’re just starting out on your journey to saving for retirement, then you may find it simpler to wait until you’ve amassed enough savings to benefit from more direction. Additionally, if you prefer to remain in control of your investments and you’re happy to dedicate the time and energy to it, then the financial advisor’s fees may not be worth it.
However, the increasing availability of financial advisors and their array of services means that it’s now easier and less expensive than ever to hire one. So, if you’re wondering what comes next, then why not give a professional a call? Most offer a free initial consultation, so there’s no risk.
Need More Help?
As you can see from our guide, choosing the right financial advisor is not an easy process, which is why we have a created a service to help you find a local expert financial advisor that suits your needs best.
Just enter your postcode and complete the simple form and one of our partnership team members will call you back and help you find a local Financial Advisor Near You.
Remember, if your financial advisor doesn’t grow with your wealth and continue to offer customised advice, then you’re free to switch.