Financial advisers

Financial advisers represent the largest single group of private wealth advisers by numbers. There are different types of financial advisers and the one you choose will influence the service you receive.

An adviser is professionally obligated to represent your interests and, depending on your wishes, to consider your entire financial outlook, from basic tax planning and living within your means, to savings, investments, pensions and mortgages. Unlike a private asset manager, financial advisers typically don't build a bespoke investment portfolio, or manage it for you day-to-day.

However, cost pressures to deliver vertical integration and to own client assets (and therefore to receive the fees for this aspect of wealth management) has propelled many advisers to operate more like a typical wealth manager and to manage money. Some achieve this by having a tied relationship with an investment platform, or a group of product providers (more on this later). Generally this is the case with franchised IFAs, but not always. It is an arrangement which can deliver cost benefits.

The cost of advice and the way you pay for it is at the heart of the biggest piece of legislation governing advice in the UK in recent times. The Retail Distribution Review (RDR) is still shaping this sector as it impacts on advisers business models. Distribution in this context means sales by product providers (such as fund managers) through advisers (wealth managers such as private banks and IFAs), who are also referred to as intermediaries, a term which can also include wealth managers themselves!

RDR's key impact has been the abolition of trail commission, sometimes referred to as retrocession. This was the system of ongoing payments made to an adviser by a product provider for choosing that provider's product, as long as the end client remained invested in it.

Such commission was controversial, because an adviser could continue to be paid by a product provider even when no ongoing advice was being provided, although it had been argued the system subsidised ongoing free advice. There were also concerns that it was an incentive to IFAs to choose the product that paid them the most commission, rather than the one that was most suitable for a client.

A key impact on financial advisers and the advised has been RDR's split between independent and restricted advice.

Regulators define 'Independent advice' as a personal recommendation to a retail client in relation to a retail investment product where the personal recommendation provided meets the requirements of the rule on independent advice.

Independent means comprehensive and fair analysis of the relevant market unbiased and unrestricted.

The rules also dictate that a firm must consider all products and this is where it has become controversial amongst IFAs.

In general, the regulator says. We expect there to be very few types of investment products sold to retail clients that would not fall within the definition (of a retail investment product).

Some IFAs say this puts too many of them into the restricted bracket, because they don't have the resources and thus cannot afford to look at every product available, or evidence to the regulator they have done so. It also makes advice more expensive and comes into conflict with some of the sector's push to integrate vertically as previously mentioned.

Some restricted advisers are still paid by a product provider for recommending a product, but this may come in one lump sum when you agree to buy it. Ultimately the client always pays over the life of the product in this case.

Alternatively a client can choose to pay by the hour, or some combination of the two, possibly with some retainer being paid, for example.

The FCA's current review into advice will likely cause further change, by lessening the regulatory load for advisers, by making in-branch advice and so-called €œrobo" advice (robo-advisers provide algorithm-based advice and discretionary investment management, without the use of human financial advisers) more cost effective, particularly for the lower end of the wealth management sector, i.e. those with less that £500,000 to invest.

Qualifications

One of the most important elements to consider when choosing an adviser is their FCA-recognised qualifications.

Every adviser must have a current Statement of Professional Standing. This indicates that they have signed up to a code of ethics and that they have completed at least 35 hours of accredited professional training each year.

Currently the minimum qualification under the FCA's Qualifications and Credit Framework (QCF) is QCF 3 equivalent, which means they have studied finance at the equivalent level to a degree module.

Popular advanced qualifications include the Private Client Investment and Advice and Management (PCIAM), Chartered Financial Planning Certificate (CFPC) and the Certified Financial Planner (CFP) licences.

They are all QCF 4+ level which is equivalent to a complete degree level.

There are also specific qualifications for specialist product advice, such as tax and trusts, pension or mortgage planning.

Examples of these at QCF 4+ level include G10 Taxation and Trusts, JO4 and JO5 pensions and MAQ Mortgages. All of these are QCF 4+.