What is an IFA? Do I need one?
What is an Independent Financial Advisor (IFA)?
Broadly speaking there are two types of financial advisors, Independent and Restricted. A common misconception is that ‘Independence’ in this context means that IFAs work alone, however it actually refers to the fact that they are not tied to any particular product provider. IFAs are regulated by the Financial Conduct Authority to advise across all regulated investment and saving products in the UK and as such their advice is impartial. Many IFAs also provide mortgage, annuity, insurance and protection advice.
Why choose an Independent Financial Advisor?
Here’s what I believe a good IFA offers -
· The ongoing support of a person you trust
· A one-stop solution for financial advice across all areas
· A full financial plan - how much must you save, invest, earn and borrow over your life to achieve your goals?
· “Whole of market” advice – hunting out the very best investments and products for you, from the thousands available
· Fee-based advice - Advisers are paid by their clients and not by commission, eliminating any hidden incentives and biases
· Full qualifications and FCA Authorisation – so you can be confident in the quality of advice you receive
· under the Financial Services Compensation Scheme, just in case you are mis-advised
Why not go to your Bank?
Financial advice was available from many Banks and Life & Pension firms, however following the Retail Distribution Review which outlawed commission payments many have closed down their advice offering. Those that retain their advice arm should have rigorous processes in place to ensure any advice is “suitable” for the client, and generally do a good job of highlighting to their customers where they might have products with better returns available.
However, bank advisors are normally Restricted, so “tied” to particular product providers, and are rewarded based on which products they sell. So, there is often a conflict of interest between you and them.
Moreover, there is significant variance in the quality of advisor and their suitability for you, and you have limited ability to “pick and choose”.
Why not manage my financial affairs myself online?
There are several reputable online brokerage sites where you can invest your money yourself, giving access to thousands of different investment instruments. They are generally only suitable for very knowledgeable investors. However, even these investors often turn to their IFA because they don’t find the time to regularly research and manage their investments.
Not optimising your investment portfolio, through limited knowledge or time, can often be more expensive (in terms of returns) than paying the cost of advice.
There are also several comparison sites that allow you to find the best deals available across Savings, Mortgages, Insurance and other product areas.
These product areas are less complex than investments, so it might be more viable to self-manage these affairs. But, it is still best to consult your IFA first, as you may overlook costly issues or fruitful opportunities which your IFA could quickly point out.
Why not use a large Wealth Manager or Private Bank?
Large Wealth Managers (aka Private Banks) tend to serve “High Net Worth Individuals”, with a minimum investment portfolio size anywhere from £500k to £5m.
Depending on the firm, you may receive the support of a wider team (e.g., a specialist Investment Research team), access to more “institutional-like” products (some Wealth Managers are side-arms of Investment Banks) and be advised by individuals with degree-level investment qualifications. You may also feel more confident with the support of a large brand.
On the down side, Wealth Managers often suffer the same drawbacks as Banks (above) – they can be tied to particular products, have hidden incentives and have varying quality and suitability of advisor.
In short, go local and find a good IFA.
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