What is a financial adviser?
A financial adviser helps you determine your financial needs and then recommends financial products and services that will meet them.
Financial advisers can generally be described as fitting into one of three categories:
- those who advise on, and sell, the products of just one company - this type of financial adviser is often referred to as a tied agent;
- those who advise on, and sell, the products of a restricted number of companies - this type of financial adviser is often referred to as ‘multi-tied’;
- those who can help you shop around the whole of the relevant market to identify the best provider for you, as well as the most suitable product. This type of adviser is known as an independent financial adviser or IFA.
Where a financial adviser provides advice about investments from a restricted range of providers of investments of the same type, they must inform you in writing of the nature and extent of that restriction.
What should a financial adviser do?
In a nutshell, when you ask a financial adviser to provide you with investment advice they should - as a minimum - do the following three things:
1. Ask you questions about your financial situation and needs, and request details of your personal circumstances. This is called a 'fact find'.
This fact finding process should include questions about your investment objectives (such as requirements for income or capital growth), your future aspirations (for example, having sufficient money to pay for a child’s education or to provide a certain level of income in retirement), your level of experience in financial and investment matters and your time horizons with regard to investing money. They should also ask you questions designed to help them understand and record what types of risk and how much risk you are willing to take with your money.
2. Explain clearly why the product (or products) they have recommended should meet your investment objectives and are closely aligned to your attitude towards risk. They must be able to demonstrate that the recommended product(s) is suitable for you, having regard to the information about your circumstances that you have disclosed to them.
3. Tell you about any and all fees and charges (including commissions that they or their firm may receive) relating to the product(s) they have advised you to invest in. They should also describe to you the different impact that paying for the advice provided, either by a fee or via the commission method may have on your investment.
How do I pay for financial advice?
Financial advisers are usually paid for providing advice by:
- commission - usually a percentage taken out of the money you invest; or
- a fee, normally paid directly by you to the adviser’s firm; or
- a combination of some commission and a fee.
When you are deciding which financial adviser to use, ask them how they can be paid. Some financial advisers that are paid by fees may give the first half-hour of advice for free, but you should always check before you engage them to provide any advice.
It is very important to note that, other than any instances where the first portion of advice may be provided free of charge, financial advice is not free. When an adviser is paid from a commission payment, you will ultimately pay for this advice through the charges that are built into the product you invest in.
Some financial advisers may be prepared to give back or ‘rebate’ to you part of the commission they will earn if you ask. In addition, financial advisers may also sometimes be prepared to ‘sacrifice’ a percentage of their commission so that the amount you invest will be increased. If you are considering paying for financial advice via the commission method, it is always worth asking the adviser whether they are able to ‘give up’ some of their commission through one of the ways outlined above.
As mentioned earlier, a financial adviser should always tell you about all fees and charges (including commissions) relating to the product(s) that they are advising you to invest in. They should inform you verbally of these fees and charges and should also provide you with written information about these, before you decide to invest.
Information that financial advisers provide you with in relation to fees, commission, product charges or penalties that may apply should always be provided to you in monetary or percentage terms. If you are unclear about how you will be paying for the advice - and/or the amount that you will pay - ask them to explain this to you.
Remember, charges can have a significant impact on the return that you may get from your investment(s), so you should make sure that you understand the charges that will apply before you invest. Compare the charges on a number of similar products to help you decide which represents the best value for you.
How can I protect myself?
Make sure that the financial adviser’s firm is authorised and/or regulated by a financial services regulator to provide investment advice (this may also be referred to as conducting investment business).
Take notes when you meet a financial adviser and keep them safe. They will be essential should there be a dispute later on and you wish to complain or query something in relation to your investment.
Make sure that you receive - and fully understand - documentation explaining the product(s) recommended as being suitable for you. Ask questions if you do not understand.
Shop around and compare different products to ensure that you are getting the product which is the most suitable and the best value for you.
Obtain a copy of the financial adviser’s terms of business and ensure you understand them. An adviser should provide you with these terms before you receive any advice from them. The terms of business should set out important facts such as the type of investment advice that the firm provides (e.g. independent or ‘tied’), how they can be paid for the advice and services they will provide, and who you should contact in the event of a complaint.
Don’t be embarrassed to ask questions or ask the adviser to go through something again, or explain it to you in clear, jargon-free terms.
Don't be afraid to say "No" to a financial adviser’s recommendation, even if the adviser has been recommended by a friend, or has gone to a lot of trouble that you don’t want to disappoint them.
Don’t sign anything until you are confident that you fully understand it.
If a financial adviser hands you a blank form and asks you to sign it so that they can fill in the details later on, refuse.
And finally, don’t get carried away by promises of amazing deals. If an investment scheme or proposition sounds too good to be true, it most likely is.
Before agreeing to invest in anything..
..you may wish to ask your financial adviser the following questions:
- How many companies are you able to recommend investments from and why have you selected this particular company and their product for me?
- What other options could I consider apart from the product(s) that you are recommending?
- What are the advantages - and the disadvantages - of the product(s) you are recommending?
- How much, if any, commission will you get paid for recommending these investments?
- How long will my money be tied up in the investment(s) for? What happens if I need access to the money that I will be investing?
- Are there charges, or exit penalties, that would apply in the early years of this investment should I need to encash part (or all) of it? (this would mean that if you have to surrender the investment early on you may get back less than you invested).
Think twice if:
- Someone suggests that you put money into a special deal that they cannot adequately explain, or cannot provide proper documentation for.
- You are told that an offer will disappear if you do not invest immediately.
- Someone suggests that you put all, or a large proportion of, your money into one single investment.
- A financial adviser’s firm doesn't appear to be authorised or regulated.
- A financial adviser keeps suggesting that you surrender your current investments and take out new ones.
Once you have invested your money you should:
Make sure that you receive written confirmation or a formal record of the money that you have invested. Read these documents carefully and query anything that you don’t understand or that was not previously brought to your attention by the adviser.
Keep these documents in a safe place.
Ensure that you receive regular (at least once a year) statements or valuations showing how your investments are doing.
What is the position in Jersey with regard to regulation?
Financial advisers based in Jersey that provide advice on certain types of investments (such as shares, funds and life insurance) must be employed by a firm that is authorised and regulated by the Jersey Financial Services Commission.
The firm and its advisers must follow Codes of Practice issued by the Jersey Financial Services Commission that are designed to protect investors.
Firms of advisers that provide advice purely on loans or mortgages do not currently have to be authorised by the Jersey Financial Services Commission to provide such advice.