FOOL'S EYE VIEW
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On pages 46 to 50 of our UK Investment Guide, we explain why you should become your own financial adviser. Some of you might ask, "Why do I need to learn to do this when there are so many qualified professionals out there? After all, there's a vast amount of information to get to grips with, much of which is confusing and stuffed with jargon, so I want a guide to navigate the financial maze." Although it's true that there are some good financial advisers out there, there are a number of reasons why you should be cautious when taking any professional advice. Here's why. Never consult tied advisers So, if your adviser doesn't have a product in his armoury that's ideally suited to your needs, do you think he'll send you home empty handed? No, what's far more likely is he'll make do by selling you an alternative that may well be a poor substitute for what would have suited you best. The reason for this is very simple. Financial salesman have demanding targets to meet and are reluctant to cut you loose without filling their pockets first. In this scenario, "best advice" often goes out of the window. For a short time in the early 1990s, I worked for the direct sales force of a now infamous life assurance company. Frankly, I was appalled at how my colleagues treated their clients as sitting ducks, to be relieved of as much money as possible in order to enrich these salesmen. Some staff would boast of making over £20,000 a month in commission – all of which was plundered from their poor, unsuspecting clients. The worst cases of mis-selling I've come across almost always feature tied advisers (frequently friends or relatives of their victims) selling high-charging, low-value, inflexible products in a horribly unprofessional and uninformed high-pressure manner. So, if you want to be relieved of your money faster than you can say "mis-selling", visit a tied adviser. Watch out for excessive commissions Nevertheless, IFAs also make their living from commission (except for a few that charge hourly fees). Since an array of investments includes vastly different levels of commissions, there is still a temptation to sell you high-charging investments over cheap, simple products. This conflict of interest (advisers needing to earn their daily bread versus your best interests) requires you to have complete trust and faith in your IFA. Unless you believe that these people are benevolent, saint-like types, you should take all advice with a pinch of salt. You should aim to give as little of your money to advisers as possible, since every penny that remains is invested for your benefit. If your adviser recommends you buy any of these products, be very, very wary indeed: * Endowments and other savings plans instead of ISAs. Endowments are inflexible, high charging plans; ISAs are cheap, tax-efficient and easy to understand. * Managed funds instead of index trackers. Over 80% of fund managers fail to beat their market benchmark. Why pay their high charges, when you'll do better with a cheap, simple tracker? * Unit trusts (UTs) over investment trusts (ITs). Thanks to far lower charges, the typical IT outperforms the average UT, yet few advisers sell ITs because their commissions are so low. Read more in The Pros And Cons Of Different Investment Funds. * Personal pensions instead of cheap, simple stakeholder pensions. You shouldn't be offered a personal pension if a cheaper stakeholder is better suited to your needs. * Free-standing AVCs when you can invest for retirement far more cheaply in your company scheme. * Here's an example of how the sellers of "guaranteed" bonds confuse the public into buying inferior products. * Read about more financial stinkers in Financial Products To Avoid. Finally, if you don't understand what you're being sold, don't buy it. Understand that financial businesses play on your ignorance, knowing that if a product is tricky to understand, it is easy to conceal outrageous charges within it. If your adviser can't explain something to your complete satisfaction, s/he doesn't deserve your business or your trust. For a straightforward explanation of the questions you should always ask your adviser, read A Plain English Guide To Investment. You should also check out Obviously Great Financial Products and visit the Fool's ISA Centre to learn more about ISAs.
Tied advisers are salespeople, pure and simple. They work for one company and can only discuss and sell their employers' products. They cannot investigate or recommend any financial product from any other company whatsoever.
The independent financial adviser, or IFA, is a step up from the tied agent. After a detailed "fact find" to establish your current situation and future needs, an IFA is supposed to scour the entire market to find the best product(s) for you.
