There are many benefits of turning to the services of a chartered financial planner. You want your wealth to stretch as far as possible and give you the independence to live the life you dream of.
A question you may ask yourself is: should I invest with a global business with a brand name, or am I okay with a smaller, personal firm? This blog will help to answer the question.
Financial planners have the expertise to advise on how best to achieve your goals. They can play an active role in managing your investments on your behalf, making key decisions on where to invest your money to ensure it is working hard in pursuit of your ambitions.
That is why partnering with a financial planner demands a certain leap of faith. Whether you are:
- planning for retirement;
- investing the sale proceeds of your business;
- wanting to maximise what you leave behind for your children; or
- turning your assets into a source of income,
there is a lot of trust put in your financial planner to deliver. At some point, you are bound to wonder - just how safe is my money?
A brief overview of the investment ecosystem
By their nature, financial investments carry a degree of risk. The art of a financial planner is achieving a comfortable balance of risk and reward. The risk of investing is not restricted to whether a particular investment performs as well as expected. People have legitimate concerns about what happens if a business they have dealings with goes bust. Plus, there are the risks of fraud, negligence and bad advice.
To better understand the level of risk, it helps to know how the investment industry works. According to FTI Consulting, the financial services sector is one of the six most regulated industries.
In the UK, all operators in the sector should be governed by the rules set out and monitored by the Financial Conduct Authority (FCA). They are subject to the authority of the Financial Ombudsman Service (FOS) which investigates complaints. And they should be members of the Financial Services Compensation Scheme (FSCS), which protects an investor’s money up to guaranteed limits.
One of the key principles of consumer protection in financial services is that the rules and guarantees are the same for everyone: large institutions and small boutique firms, major investment funds and small private investors.
You may not realise it, but the largest global bank doesn’t provide higher FOS or FSCS levels of protection than your local IFA.
When you ask a Chartered Financial Planning firm to manage your investments, many of them won’t handle your money. Investment transfers go to an investment host business. The money is then invested in selected retail investment products, such as ISAs, shares, personal portfolios and pensions, mutual funds and so on. Uninvested funds are held in client accounts in accordance with FCA and Prudential Regulation Authority rules.
There are key things to take from this regarding the security of your money. Every node in the investment ecosystem – the financial planner, investment host, fund manager, registrar for investment products - is regulated by the same rules of conduct policed by the FCA.
Those rules dictate that investment assets are separate from any business that handles or manages the investment’s own assets. This is an important safeguard when businesses hit financial difficulties.
FSCS and insolvency
One of the biggest concerns you may have is that having invested your money, the scheme then goes bust, and all is lost. That is why the FSCS was created in 2001. If a company you have invested in or is handling your investments becomes insolvent, your losses are protected to some degree. Check the FSCS website for specific dates and terms.
- Long-term insurance (life and PHI): 100% with no upper limit.
- Annuity (being drawn): 100% protected.
- A pension only invested in the life office’s own insured funds would have 100% protection. Where external funds are used or where a SIPP invests in a variety of assets, the position will depend on the investments used.
- Cash in bank/building society account: £85,000 per person for each separately authorised bank/building society (some banks share a license meaning only one set of £85,000)
- Investments: £85,000 per person
- Mortgage and endowment advice: £85,000 per person
Investments, including mutual funds, self-invested personal pensions (SIPP) and onshore bonds, all fall within the FSCS remit. In many cases, there are additional protections. Where investments are held in trust, assets are often 100% ring-fenced and protected.
For example, in the case of mutual funds and SIPPs, if the fund manager becomes insolvent, a custodian is appointed whose sole purpose is to protect the investment assets, which lie beyond the reach of creditors.
Fraud and misconduct
The other common concern people have is that they will be mis-sold a product. You lose the money you invested as a result of misconduct or negligence. Even if the advisor you deal with is honest and well-meaning, what is to guard against fraudulent behaviour at some other point?
The 2008 global banking crisis involved misconduct at the highest echelons of the world’s biggest investment banks. Regulators around the world doubled down on efforts to improve governance and regulation of the markets in order to protect ordinary investors’ money, and to rebuild confidence in the system.
The FCA has made great strides in improving governance and tightening regulations across the industry to make the investment markets safer for ordinary investors. Conduct is monitored, and alleged offences are investigated and punished. Anyone found guilty of an offence is liable to have their license revoked.
And should service providers face financial difficulties, the rules governing ring-fencing of investment assets ensure most investors can be confident of getting their money back. The FSCS acts as a further guarantee to cover losses.
Whichever firm you appoint to look after your wealth, there are a few things to check first.
- Employees should be signed up to the FCA Code of Conduct, along with similar schemes operated by the Personal Finance Society and the Chartered Institute for Securities and Investment.
- All new employees should have been subject to a criminal records check (now called a DBS – disclosure and barring service).
- Each year, employees should be subjected to a credit check to ensure that they are not under financial duress.
- Look for a firm who proactively monitor client work and take all complaints seriously.
- In the event of negligence leading to financial losses for clients, check the firm is covered by Professional Indemnity Insurance and ask for a copy of the current policy schedule.
- Check the Financial Services Register to view the status of your chosen firm and the regulated individuals.
If you are dissatisfied with any internal procedures, you can take your concerns to the Financial Ombudsman. The FOS has the power to make an enforceable judgement. This might include paying compensation for proven misconduct. The FCA has increased the FOS award limits to: £350,000 for complaints about acts or omissions by firms which take place on or after 1 April 2019, or £160,000 for complaints about acts or omissions by firms which took place before 1 April 2019 and which are referred to the FOS on or after 1 April 2019.
The decision to invest your money carries an element of calculated risk. The nature of the investment markets means there cannot be any guarantees. What you should not have to worry about is losing your money, either because the business you deal with gets into financial difficulty, or because you are mis-sold products or fall victim to fraud.
Choose a reputable, established financial planning service provider, licensed and regulated by the FCA. You can feel confident about avoiding such risks in the overwhelming majority of cases.
If you value a second opinion, contact Capital. Our second opinions are free and impartial.
Please note: The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. The Financial Conduct Authority does not regulate Trusts.