You’ve got a financial matter to solve; perhaps retirement is looming, and you feel unprepared. Or you are selling your business and want to ensure that the money will fuel your future. You feel out of your depth and there’s too much at stake to go it alone, you need some financial advice.
So you decide to hire a professional, to help you navigate the complexities and avoid potential pitfalls. The big question is; where can you find such a person? You need someone you can trust and who will provide you with the best advice.
Well, you could speak with your bank. Most high street and private banks provide financial advice services. They can help with mortgages, insurance, and savings and investing.
Alternatively, you could go with an Independent Financial Adviser (IFA) to advise you. What’s the difference? Is one better than the other? And how can you decide? Here is a quick guide to the potential pros and cons of each:
You have known your bank for years and although you may have felt frustrated with them from time to time, they are a familiar brand. It's likely that your bank has a branch near where you live or work, so you can pop in to see an adviser easily.
By contrast, few IFAs are household names; most are small boutique businesses without a national presence. You may be taking a leap of faith when deciding to work with a smaller independent firm.
In terms of brand awareness and convenience, in most situations, your bank wins. The score is 1-0 to your bank.
When it comes to making a purchase of any kind, you like to have the widest range of options. The reason Amazon is so popular is that the choices are almost unlimited. You don’t want to shop in a store with only a handful of items when you can easily access almost any products and secure a good price.
Most banks offer financial advice on what is known as a restricted advice basis. This means that they will only offer a limited range of products and services, often the in-house brand.
This may be satisfactory if you are looking for a simple product such as a cash ISA. However, its unlikely to cut the mustard when seeking comprehensive advice. With your array of financial concerns, you need the best solution for each unique matter. The best answer for you may or may not be in their limited range.
By contrast, as the name suggests, IFAs must provide independent advice, free from constraints. Therefore, IFAs can (and must) consider all relevant products and services from across the entire market. A bit like the Amazon of financial advice.
With greater choice, the opportunity to find an ideal solution at a completive price is far greater. Consequently, independence wins over restricted - a solid point for IFAs. The score levels at 1-1.
Of course, you want to know how safe your money is whether you use your bank for advice or hire an IFA. The answer is, it depends. When it comes to your cash savings held on deposit at your bank, those funds are considered a balance sheet asset of the bank.
Therefore, in the case of a catastrophic failure, and the bank going bust, your money may disappear too. Remember the queues along the street when Northern Rock was facing bankruptcy a few years back?
There is a safety net entitling you to up to £85,000 compensation through the Financial Services Compensation Scheme (FSCS).
Most IFAs are not authorised to handle clients' cash. Therefore your investment funds are held by independent custodians, ring-fenced and in your name. In the event of the IFA facing financial difficulty, your money would be safe. Other than the hassle factor of finding a new adviser, your money is not at risk.
The rules for products like ISAs and pensions are a bit different. Pensions are covered by the FSCS up to 100% of the claim (with no upper limit). This is regardless of whether your adviser is a bank or IFA.
For investment ISAs, the limit is £50,000 per account and in the same way as pensions, the protection level is the same regardless of who is advising you.
For more information on how safe you money is with a financial planner, read this blog.
An honourable score draw. 2-2.
If you bank with one of the high street banks, you are a customer of a listed company. That means the bank is listed on the stock market and has shareholders who have invested expecting a good return. As a public company, the bank’s board of directors’ main job is to provide the shareholders with the best return and drive the share price higher.
That can only be done by increasing revenue, cutting costs, and making more profit. As a customer, you are a source of potential profit. It is in the interests of the shareholders for your bank adviser to extract the most profit from your relationship. In some instances, this can lead to high charges on products and potentially mis-selling when advisers are put under pressure to hit sales targets. The PPI scandal is an unfortunate example of this.
Of course, IFAs need to pay their staff and make a profit to remain in business too. But few are listed businesses with demanding shareholders with high pressure and demanding targets to achieve.
Analysis by the Financial Times indicated that total fund charges can be about 2% of your portfolio each year. Add about another 1% for the bank fund manager. If you had £3m in your portfolio, you could be being charged up to £90,000 a year. Most IFAs fee tariffs are considerably lower than that. Always ask for a detailed cost breakdown in advance of making your decision.
A well-earned point for better value IFAs. 2-3.
5. Continuity of service
Selecting a financial adviser to help you look after your family’s financial security is an important task. You will want to work with an adviser that you like, trust, and respect. At the same time your adviser should spend a lot of time getting to know you, your values, your concerns, and your future plans, to give you the best long term financial advice.
You will share a lot of personal information, beyond the money, as you begin to work together.
Having invested time and emotion in getting to know each other, the last thing you will want is for your adviser to move on to another role and leave you to start again from scratch with a replacement. The revolving-door problem.
However, that comes with the territory when engaging with a bank adviser. The good advisers will get promoted and the bad ones will leave, and you will be faced with starting a new relationship. Some major banks with investment arms actually enforce client/adviser changes so that the bond is never strong.
By contrast, most IFA firms are smaller businesses which often have high levels of staff retention. You may be advised by an owner or director of the firm, who is likely to be around for many years.
If you prefer long-term personal relationships, the IFA wins again. 2-4.
Score: 4/2 to the IFAs.
There is no substitute for doing your research. Meet up with two or three firms and select the firm that you think ‘gets you’ and feels like a good fit. Read this blog for five things you need to know before selecting a great financial planner.
Best of luck.
If you would like some more information about your options, contact Capital today to speak to one of our financial planners.