This article was written for and appeared in the October issue of ‘The Barrister Magazine’.
The decision of who to entrust with the management of your money is one that can have huge ramifications on your future. However, whether you choose IFA’s, financial planners, wealth managers or private bankers; those who manage private client money can be very slick convincing salesmen. So, how do you sort the wheat from the chaff and pick yourself a genuine adding-value adviser?
The purpose of this article is to identify the main areas that I believe should influence the quality of advice you receive, and the red flags that you should avoid. This checklist can be used when assessing both new advisers and those who currently advise you.
The Firm
The first place you should start with is the firm behind the advice.
Ownership & Influence –Who owns the company behind your potential/current adviser? Also, if they are part of a network or group, who owns the parent or principal firm? This is very important as there are financial advice firms that are owned or part owned by companies with vested interests. This includes product providers, banks, fund houses and insurance companies. Where this is the case, how can you be sure that the owners are not putting pressure on the advisers to sell their own products? To the best of your knowledge, you need to be happy that the motivations and goals of the owners are not going to cause a conflict of interest with your own.
Independence – Does the company operate from a list of products? If this is the case, how can you be sure you are being given the best advice? You may receive the best advice the adviser can give, but this might be different to the best advice you could receive from the whole of the market. You need to be receiving advice from an adviser who chooses products from the whole of the market and operates on an open architecture basis in terms of investment choice.
Source of Income – Where does the firm secure its income from? Many professional firms have multiple streams of income. Examples of this may be initial planning fees, commission from transactions, ongoing fees, and rebates from fund managers as well as earnings from internal products. This naturally creates bias and conflicts of interest. If the firm earns extra by selling their own products, they may push this course of action whether it is in your best interests or not.
The Adviser
Secondly, you need to look at the individual adviser. This extends beyond the sales talk and drills down into how adept they are at what they do.
Qualifications – What level of qualifications does your adviser have? The current minimum level of qualification within the UK is QCF level 3, rising to QCF level 4 at the end of 2012. This, although being an improvement, does not mean that all advisers will be qualified to deal with your situation. You should look at what specialist qualifications your adviser has and whether they fit with your requirements. For example, if you have complex pension arrangements, look for an advanced pension qualification such as G60 or AF3.
Experience – What experience does the adviser have of dealing with clients like you? This is an important point as there are many advisers out there who are inexperienced in dealing with large and/or complex situations. You need to find out exactly what the past experience is of your adviser to establish if they will be in their ‘comfort zone’ when advising you. You do not want to be their first ‘test’ case.
Remuneration – How is your adviser remunerated? This is an important point as it affects their motivation. Are they remunerated on adding new clients, servicing old ones, selling products, or some other means? If they are remunerated on new clients, the motivation will be purely to add you as a client and move on; there is no motivation to look after you going forward. Linked to this, is the question of targets that come from their supervisors. If they are being pressured from above to sell more equity funds, you may be sold products you don’t need.
Client Numbers – How many clients does the adviser currently have and is there an upper limit set? Your adviser only has a finite number of meetings they can have during a year, especially if the meetings are to be high quality. If your adviser has too high a number of clients, or doesn’t set an upper limit, client servicing may suffer. In reality, if your adviser has more than 100 clients, you need to find out what kind of support structure is behind them and whether you think they can deliver the service you require.
Point of Contact – Is the adviser in charge of the investment strategy formation? Will they be the point of contact moving forwards? Very often, the person you deal with is a ‘relationship manager’. This means they have very little input into the actual strategy. How can a back office person design a strategy accurately if they don’t know you and your goals?
Service Levels – What will the ongoing service include? You need to know what frequency of meetings you will have, as well as what the content of these meetings will be. You should also find out about what kind of regular reports you will receive. You need to know what is and isn’t covered by the ongoing fee so you are aware of any extra charges that may become payable.
Fees
This is an issue that has been well written about in the press; however, it is important to know what to look at when speaking to advisers. Your adviser should have a clear charging structure that they are happy to discuss. It should not be based on product sales (i.e. commission) and should be as conflict free as possible.
Initial Fees – What are the upfront fees payable to the adviser? This will include fees for both planning and implementation. These fees can be expressed in monetary terms (e.g. £5,000) or in percentage terms (e.g. 1% of £500,000) or both (e.g. £2,500 for planning plus 1% transaction fees). Whichever way they are expressed, it is important to understand them from both a monetary and percentage basis. A difference of 1% sounds small, but on a portfolio of £500,000 it equates to £5,000. There is nothing wrong with your charge being a percentage, as long as you understand what you are paying for and there is value being received.
Transaction Fees – What are the costs levied for buying and selling holdings in the portfolio, and who do these get paid to? It is important to bear in mind that transaction fees can lead to an incentive to change and trade. If there are transaction fees involved, you need to ask enough questions to ensure you are comfortable that this will not lead to excessive trading.
Ongoing Fees – What are the ongoing fees being paid to your adviser? This is a key point as these will be paid for a much longer time period. These fees can range between 0.35% and 1.50% per annum. The objective is again to match up the amount being paid to the value delivered. This is not to say that you should automatically opt for the lowest fee. Higher fees can be acceptable if they cover areas like advanced financial planning or are inclusive of transaction fees. Importantly, there should be no bias between asset classes or products. If your adviser gets paid more on the equity portion than fixed interest or cash, there may be the temptation to weigh the portfolio towards equities, which would result in higher risk. By ensuring the adviser is paid the same no matter the asset class, you can ensure there are no conflicts of interest. As an aside, your adviser should be charging an ongoing fee. If they’re not, your ongoing advice will likely be paid for by other sources and this may influence the recommendations made to you.
Additional Charges – Are there any other charges or commission that will be levied? Sometimes advisers will earn commission on product sales in addition to fees. Equally, sometimes they charge extra for other miscellaneous items. Again, this is not necessarily a bad thing, but you need to ensure you are made aware of the full charging structure and are happy that it is conflict free.
The professional management of money can add innumerable value to your situation through actions such as managing risk, helping to protect and grow your assets, minimisation of taxes and organising the efficient transfer to the next generation, to name but a few. However, it can also cause irreparable damage when the interests of the firm or adviser are put ahead of your own, either through poor structure, lack of expertise or a remuneration structure that is in conflict with your interests. For this reason, it is important that you conduct a thorough due diligence on any potential adviser and the firm that supports them, to ensure that they are the correct partner for you.
One final thing to bear in mind throughout this process, your adviser should be able to answer all questions truthfully and fully, with nothing hidden. They will expect full information and co-operation from you when collating their background research… why shouldn’t you expect the same?!
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