Do I really need to use a financial adviser?

Financial adviser meeting with client

As someone who has spent over 50 years working as a financial adviser and financial planner you would probably expect me to say ‘Yes’ to this question.

But not everyone needs to use a financial adviser in every circumstance. This section is designed to show you when you should use a financial adviser and when you really don’t need to do so. I will use the term financial adviser to encompass both financial advisers and financial planners for simplicity.

How much capital do I need to warrant using a financial adviser?

Financial advisers naturally charge fees. The cost for a financial advice firm of adding a new client will obviously vary with the complexity of the client’s circumstances. According to research carried out in 2019 by NextWealth and the Personal Finance Society (PFS) the average cost to onboard a client is £1,543.

So if you only have £30,000 to invest you could be losing 5% straight away which makes little sense.

For this reason financial advisers generally won’t take you on as a client if your investable capital is below a certain minimum. This varies a lot and could be anywhere between £80,000 and £800,000.

It also varies on where you live. If you live in London or the South East you will find that financial advisers generally require a higher level of assets from a new client than other areas.

Certainly if you have so far accumulated less than £80,000 of pensions and investments you will find it very expensive, as a percentage of your wealth, to use the services of a professional financial adviser with a physical office that you can visit. In this case an alternative, if you are happy dealing online, is to use the services of a robo-adviser firm.

Many financial advisers offer an initial consultation without cost to you or any obligation to proceed further. So even if you don’t have sufficient capital to warrant the use of a financial adviser you could find that the adviser is willing to point you in the right direction following such a discussion.

What if I want to invest monthly or contribute to a pension monthly?

Prior to 2012 financial advisers would receive a commission from a product provider for setting up an investment or pension. This practice was ended as it could lead to an adviser choosing a plan from a provider which offered a higher commission rather than one that was most suitable for you. Whilst the majority of  advisers always put the needs of their clients first, regulators have to set conditions which protect clients from ones which do not.

One unfortunate result of the removal of commission is that it has created an advice gap amongst the general public. If you only want to invest on a monthly basis and do not also have the required minimum capital amount then you are unlikely to be able to do so via a financial adviser. Remember that the financial adviser has got to cover his onboarding cost of around £1,500 and this can only come from you.

So if you are just starting out on your journey towards prosperity and you want to contribute, say, £500 a month to a personal pension or £750 a month to a Stocks and Shares ISA you should use one of the online investment platforms such as Vanguard, Fidelity, AJ Bell, True Potential or Wealthify.

What if I just need life insurance or health insurance?

Here you might be in luck. This is because financial advisers can still receive commission on these products. There is a lot of information on the internet to help you work out how much cover you need without an adviser, for example confused.com and moneysupermarket.com.

While you can purchase the cover you need via such websites you won’t receive any advice and they usually have a more restricted panel of companies to choose from. For example, you should consider putting most forms of life insurance cover under trust. A financial adviser can arrange this for you. You may be a company director in which case a financial adviser can arrange a type of cover which your company can pay for and receive tax relief on the premiums.

When it comes to arranging health insurance such as income protection and critical illness cover, getting the right product features is vitally important. Furthermore, premiums can be variable, guaranteed not to increase, or guaranteed to increase by a fixed amount with your age. A good financial adviser can stop you making a mistake here.

Financial advisers have the tools to compare products in detail and not just the lowest premiums. If you shop around you should be able to find a financial adviser who is happy to arrange such cover for you by taking the commission from the product provider as their fee.

You can find independent financial advisers on Unbiased, VouchedFor and New Model Adviser Top 100.

What is the best age to see a financial adviser?

I wish it were possible for every person starting out in their first job to talk through their goals and aspirations for life with a financial adviser. After all if you wanted to improve your physical fitness the earlier you get started at the gym the better. It is the same with your financial wellbeing.

However, the fees that financial advisers need to charge to run a profitable business make this impossible for many younger people who are saving for their own property, buying a car and possibly paying off student debt. You wouldn’t want to trust your future financial security to an unprofitable financial advice firm.

If you are a young entrepreneur already building a successful business then you won’t mind paying the fees required by a financial adviser and you will gain a lot of benefit by doing so. However, if you are in your 20s or early 30s and are not likely to be settling the world on fire anytime soon you would be better off using one of the online investment platforms such as Vanguard, Fidelity, AJ Bell, True Potential or Wealthify until your assets are of a sufficient size.

What is the difference between a financial adviser and a financial planner?

In the UK the terms financial adviser and financial planner are often interchangeable and the same person can at different times be both.

The financial planning aspect includes assessing your situation, agreeing objectives, creating a plan to meet your long-term objectives and managing that plan with your commitment. Financial planning, of itself, is a holistic activity rather than one which is concerned with arranging products. The financial plan provides a plan of action and, in theory, it could simply include generic product recommendations which would not be a regulated activity.

Where you are provided with specific product recommendations that is where the financial advice aspect comes in. That is, of course a regulated activity.

So, if an adviser recommends that you should be putting, say, 15% of your income aside into a personal pension plan and he or she stops there, they are acting as a financial planner. However, if they go on to say that the 15% should be contributed to an XYZ Personal Pension Plan then they are acting as a financial adviser and must be authorised and regulated to do so.

What is the advice gap and why does it exist?

There is, as mentioned before, an advice gap in this country. This is the number of people who are not taking financial advice. Depending on the research you look at the advice gap could represent almost 90% of the UK population. Whatever the figure actually is, it is just not possible for most of the working population to use the services of a financial adviser.

Most financial advisers work very hard to provide trustworthy, suitable, client-centred advice, but many people find it hard to differentiate between regulated advice and generic guidance. Worse still, there is a strong theme of distrust around the impartiality of advice and the value it provides.

This is made worse by a complete failure of our education system to teach basic financial principles. A number of altruistic financial advisers provide financial teaching in schools and colleges but this is a drop in the ocean to the real need for the children in this country.

New digital services, known as robo-advisers, have emerged in the UK to fill that gap, but these tend to provide ‘guidance’ rather than the personalised advice available from a financial adviser.

What should I do if I can’t use a financial adviser?

If, for the reasons given, you find that you are not able to use a financial adviser there are ways that you can get very helpful guidance without actually receiving personal advice.

A good place to start is the MoneyHelper Service which has been set up by the government to provide ‘free and impartial money guidance’. 

If you are particularly wanting guidance on pensions then Pension Wise has also been set up by the government to provide ‘Free and impartial government guidance about your defined contribution pension options’. For some reason this is more accurately described as guidance.

If you want to ask an expert panel a specific question then Boring Money, an excellent website run by Holly Mackay, has an Ask an Expert facility as well as lots of useful information.

There are many other websites which seek to provide generic guidance on financial planning including our own Useful Money Guide, so do use these to help you along your own financial journey. By the way, you can also send me your questions at Ask Question.

Do financial advisers add value?

Any experienced financial adviser is able to reel off a number of situations where they have saved clients from making a costly mistake or improved their financial wellbeing noticeably. They will be able to explain how they helped people at really difficult times in their lives such as bereavement or divorce.

Drawing on years of in-depth research, Vanguard Asset Management (not a firm of advisers) has produced seven key components of what they have called Adviser’s Alpha. That is, the seven critical benefits that advisers offer clients in terms of their investments. These are:

  • Asset allocation. The overwhelming factor in determining investment performance
  • Rebalancing. Keeping a portfolio’s risk and return profile on course
  • Lowering costs. The one factor guaranteed to improve returns
  • Behavioural coaching. Avoid the costly mistakes of giving in to fear and greed
  • Tax allowances. Tax-efficiency is key to getting the best results
  • Spending strategy. Crucial to maintaining the value of a portfolio in retirement
  • Total return versus income. Making the most of a portfolio for both income and capital

 

The following is a quote from the Vanguard research carried out in 2019.

In a recent study, we have been able to observe the effects of professional advice on a large number of clients with comparable experience. The data were mapped over a period of five years and we looked at the impact of advice from three perspectives, portfolio changes, financial outcomes and emotional wellbeing.

The median age of the participants was 65, though ranges in separate areas of the study extended from under 30 to over 70. Median investible portfolios were between £190,000 and £390,000.

Key findings

Portfolio value: Over 44,000 participants were observed six months before and six months after obtaining professional advice. We saw that good advice can be particularly helpful in addressing private investors’ typical handicaps, such as procrastination, inertia, and home bias.

Financial value: We looked at the likely financial outcomes for over 100,000 participants, finding that around 80% of the individual advised investors were highly likely to reach their retirement goals.

Emotional value: In a survey of over 500 respondents, we found that the emotional, or personal, component of advice accounts for nearly half of the value assigned to the receipt of advice.

Our aim in this study was not to define all of the possible measures for each of the three dimensions we observed, but to highlight the need to see advice from these different perspectives when assessing value.

On the portfolio metric, getting good advice helped address well-known issues affecting previously self-directed investors, such as home bias and inertia. In terms of financial outcomes, with the right advice, 80% of advised clients were put on track to meet their long-term financial goals for retirement.

But the third, emotional, dimension, while harder to measure, was just as important, or maybe more so – accounting for almost half (45%) of the value assigned to the advice relationship by investors. Without trust or the feeling of a personal relationship with their adviser, most investors are less likely to feel a sense of financial wellbeing.

Good financial advice, it turns out, has more than the potential to underpin financial security. It can add to the quota of our happiness.

Written by Cynthia A. Pagliaro and Stephen P. Utkus.

Financial advisers do so much more than simply manage your investments. They provide advice on a wide range of financial matters including protection in the event of an early death or disability, tax planning, school fees funding, pension funding and taking pension benefits, care fees funding and estate planning. Some specialise on helping individuals achieve their life goals while others specialise on helping business owners.

How can I make sure I am using a good financial adviser?

All UK financial advisers have to be authorised and regulated by the Financial Conduct Authority (FCA). They will either be authorised directly by the FCA or indirectly as an appointed representative of an authorised company. One is not better than the other.

All UK financial advisers have to have what are called level 4 qualifications. But of course their actual qualifications and experience can vary widely.

In terms of qualifications you should look for a Chartered Financial Planner or a Certified Financial Planner as both qualifications show that the person has achieved the highest level of qualifications and is serious about being the best financial adviser they can be. There are lots of bogus qualifications out there, or fairly meaningless ones. so I would stick to these and ignore the others.

Anyone with these qualifications is likely to have the necessary experience you need.

You should also check UnbiasedVouchedFor and New Model Adviser Top 100. There are other websites purporting to list the best financial advisers in your area but these are often paid for by the financial adviser firms so you would need to beware.

If you know of a family member or friend who has successfully used a particular financial adviser that can be a good place to start.

Bear in mind that some financial adviser firms are independent and can recommend from the whole marketplace and others offer advice on a more restricted basis. The financial adviser should make it clear which type of advice they provide at the earliest opportunity and in their Terms of Business.


Links to more information

  • If you need personal financial advice then I am happy to introduce you to Flying Colours Life who have access to independent financial advisers throughout the UK

Important

This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.

Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe My interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.

If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.