We hope the following will help you obtain a speedy understanding of some of the main aspects relating to financial advice and advisers.
An Independent Financial Adviser (IFA) is someone who has free access to all financial products on the market. In theory, the adviser is free to select the most appropriate product for your financial needs, and this includes matching your ethical values to the funds that are available. We in theory as in reality far too many IFAs have a very limited knowledge of ethical funds (despite the market being nearly 25 years old) and, importantly, many IFAs only pick products and investment funds from a small panel of providers. This makes their job very simple, aids compliance but does limit the quality of the advice available. If the most appropriate product or fund for you in not on their panel, many advisers will push you towards something else, without necessarily telling you that something better is available.
Ethical Investors are IFAs, with one caveat. We do limit the advice we give, and thereby the products and funds that can be presented to our clients. The limitation is one based on ethics; we will only advise on and arrange investments that are linked to social, environmental or ethically screened funds. We see this as an advantage because it makes us specialists in the area that is relevant to our clients. It is better than a more generalist IFA operating from a limited panel where this may hinder the quality of the advice given.
If an adviser is not fully independent, then they are generally a tied agent of a small number of companies, or confined to selling the products of a single company. The former adviser might in theory have access to one or two ethical funds, but whether these would match your own ethical profile is difficult to know. The latter adviser (usually found in a Bank or Building Society) will find it almost impossible to find an ethical fund form the sole company whose products they have been appointed to sell.
As a general rule of thumb, those who do not wish to invest ethically take pot luck as to whether they receive good advice for a tied adviser. For ethical investors, it is virtually certain that they will receive completely unsuitable advice from a tied adviser.
Ethical investors, if they need advice, should only ever use an IFA.
No one is forced to use an IFA to buy financial products. However, using a good IFA (if you can find one) is likely to remove much of the stress from your financial planning, will be able to point out ways to improve your long term financial position, and will often have knowledge of financial products and services that it would be almost impossible for a lay person to find.
An IFA's interests lie in looking after their clients for the long term. Other advisers can, in many cases, be more interested in the short term selling opportunity than the long-term client relationship. This is often evidenced by how the adviser chooses to be remunerated (see later). Advisers who do to link their remuneration to the long term value of their client's assets are, it may be assumed, interested more in a large up front fee or commission. Basically, if an adviser generates less then 25% of their income from ongoing fees and commissions, they should be avoided.
Ethical Investors's income in now very close to 60% ongoing fees and commissions linked to the value of our client's assets, and the minority relates to new business. It is, therefore, absolutely in our interests to continue to look after the interests of our clients, to make sure that they are in the very best funds and to offer ongoing advice as and when it is needed.
Fine, why not? Well, and you could say that we would say this, it is going to involve a very substantial amount of your time and resources to replace the role of a good adviser. We don't believe that a quick search of the Internet is going to provide anyone with enough information to carry to their own financial planning. Those who do go it alone need to fully understand the structural differences between, for example, Unit Trusts, OEICs, Investment Trusts, Investments Bonds, PEPs and ISAs if they are investing for the long-term. For those looking to invest in a pension, you will need to understand the merits of a Stakeholder Pension, Personal Pension, AVC, FSAVC, Section 32, SIPP, Drawdown, Phased Retirement, and Annuities to name but a few. Need life cover? Well, do you buy Decreasing Term, Level Term, Family Income Benefit, Whole of Life (Guaranteed term based or Unit-linked)?
After you've gained the appropriate level of knowledge in all of the above, you then need to undertake your research into the ethical funds that are available. Every ethical fund is different, has a different set of ethical values, different ways of interpreting the apparently similar ethical values and not all ethical funds are available to be linked to the financial products that meet your needs.
Taking all of the above into account, a good IFA is not unreasonably confident in being able to offer a good service, with good value for money. If the advice offered turns out to be inappropriate, you can turn to the adviser to redress. If you get it wrong, well, we are then in the realms of Caveat Emptor.
At the risk of being more than a little obvious, the fact that you are reading this means that, in our opinion, you've found one! Seriously though, you should probably have a look at the information from 2-3 IFAs to get a feel for how they operate, their experience and their charges.
If you are looking to invest ethically, then there is a national organisation of IFAs that specialist (so some degree) in ethical investment. The Ethical Investment Association (www.ethicalinvestment.org.uk ) is run by IFAs for IFAs, that want o promote the area of ethical investment. The organisation is run by volunteers (Ethical Investors's Director is on the Steering Committee) and all of the members pay to join because they wish to increase their knowledge of the ethical market as well as be part of the wider promotion and development of ethical investment.
We would argue quite strongly that if an IFA is not a member of the EIA, they are not only demonstrating a lack of commitment to the ethical investment market, but it would be quite reasonable to also question their knowledge of the ethical market. I this case, do you really want to be taking advice from someone who really doesn't know what they are doing. They may talk a good talk, but by not being a member of the EIA, they are proving their lack of interest in walking the walk.
Financial planning is a process that an IFA will go through to establish the current financial position of a client and from this establish a financial plan that meets both the aspirations and resources of each individual client. The process of financial planning is bespoke to every client, because everyone's needs and aspirations are different. Add to this the complex area of ethical investments and the financial planning process is one that needs to be undertaken by a qualified expert.
It is our view that only an IFA can go through the financial planning process with a client. Any other adviser is only in a position to sell you something.
The debate over fees vs commissions has raged as long as their have been advisers. The point is that the most appropriate way of paying your IFA is up to you. Some advice would be best served paying a fee for. Other advice is probably best paid for by allowing the adviser to receive commission.
Whether you pay for advice by a fee or by commission, the point is that you are paying for the advice. Even if you are only buying a product, you are still paying for the advice. The next time your bank or building society try to push a product or their advice service, remember that they aren't doing so on charitable grounds they want to earn a fee or commission. So, before you sign on the dotted line, ask yourself if the fee or commission you are paying (this must ALWAYS be disclosed at the point of sale) is worth it. The commission might be hidden in the product charges, but you are still paying it.
At Ethical Investors we have an open approach to how we are paid. It is something that we engage the client in, ensuring that both parties are happy with the remuneration receive/paid and that it is commensurate with the advice offered and the work involved. Whether a fee or commission is better depends on each situation. Her are some examples: -
You want to invest £1000 in a Mini Stocks and Shares ISA because we do not insist that we make a profit on every client, we are freer than most advisers to be honest when it comes to choosing how we are paid. Our hourly rate for advisers is £125 and it might take 1.5 hours to assess the needs of a client, check the most suitable ethical fund for the investment and prepare the detailed report and submit this with the appropriate application. Cost to client - £187.50. In this situation we would advice the client to allow us to be remunerated by commission. This is because the commission on a £1000 investment is 3% = £30.
We'd be delighted for someone to pay us on an hourly rate, but it would be rather pointless to do so given that the commission is only 16% of the fee route.
You would like an assessment of your old pension plans this is a fee based piece of work. This is because commission is only payable when a new product is purchased. What you do not want is for the advice you receive to be biased towards getting you to enter into a new plan, to generate commission. Paying a fee to have your existing plans reviewed leaves you with a detailed report and a suggested plan of action (even if this is to do nothing). You have paid the adviser a fee for the time take to review and report on your existing plans. If, as a result of the review it is in your interests to move some of your existing plans into a new one, then you will be offered the choice to pay the original fee, or use any commission from the new plan to offset the fee this is your choice.