Independent Financial Adviser

Independent Financial Advisers or IFAs are professionals who offer unbiased advice on financial matters to their clients and recommend suitable financial products from the whole of the market.

The term "Independent Financial Adviser" was coined by Peter Glover, the former chief executive of Clerical Medical to describe the advisers working independently for their clients rather than representing an insurance company. At the time (1988) the UK government was introducing the polarisation regime which forced advisers to either be tied to a single insurer or to be an independent practitioner. The term is commonly used in the United Kingdom where IFAs are regulated by the Financial Services Authority (FSA) and must meet strict qualification and competence requirements.

In the UK the industry has been de-polarised since 2005. There are now four main classes of adviser: tied advisors (working for one financial institution), multi-tied advisors (paid by more than one financial institution), whole of market advisers (working with all companies but only on a commission basis) and independent financial advisers. Independent financial advisers must offer their clients the option to pay for advice by fee rather than commission.

Typically an Independent Financial Adviser will conduct a detailed survey of their client’s financial position, preferences and objectives; this is sometimes known as a ‘factfind’. They will then advise appropriate action to meet the client's objectives; and if necessary recommend a suitable financial product to match the client’s needs.

Individuals and businesses consult IFAs on many matters including investment, retirement planning, insurance and mortgages (or other loans). IFAs also advise on some tax and legal matters.

Paying for advice

Traditionally IFAs have relied upon commission paid by product providers to pay for their services. In recent years there has been a shift towards fee based advice as this is perceived as fairer toward the client. However, due to under-capitalisation in the advice sector and consumer reluctance to pay for something they perceived as getting for free, the transition to fee based advice has been slow and concentrated in the high net worth sector.

To encourage client's awareness of the cost of advice, and to stimulate a market in advice, the FSA has introduced a new disclosure regime for advisers giving regulated investment advice. Since July 2005 this regime insists that advisers who market themselves as independent must offer a choice of remuneration to clients. The adviser must offer the option of paying for advice in three ways, through commission, fees, or a combination of fees and commission.

Commission: Traditionally the most common way to pay for advice is for the IFA to receive a commission from the product provider. The amount of commission must be disclosed, and some IFAs will rebate a portion of their commission, particularly in Execution-Only cases. The amount of commission and whether it is deducted from the amount you actually invest or is included in the cost of the investment varies from product to product.

Fees: Less common than commission, all IFAs must offer the option of working for a fee. Depending on the size and type of the investment, and the complexity of the advice, this can work out cheaper than paying commission.

Combination: It is also possible to pay a combination of fees and commission. In this situation the IFA will rebate a proportion of the commission they would have been due in a commission-only scenario.

There are strict requirements for the type and amount of payments to IFAs to be clearly disclosed, so it would normally be quite easy to determine the cheapest option for a particular investment.

Qualifications

All IFAs must have an absolute minimum of one of the two industry-standard qualifications or equivalent before they are allowed to practice. These are the Financial Planning Certificate, or its successor, the Certificate in Financial Planning, both issued by the Chartered Insurance Institute (CII), and may be denoted by the CertPFS designation if the adviser is a member of the CII's Personal Finance Society. FPFS and APFS are the highest CII designations and indicate career minded individuals, many of whom will have specialised in technical financial planning related topics, rather than insurance as the Institute name suggests. A Fellowship (FPFS) is a recognised degree level qualification.

All IFAs also have an obligation to keep up with current developments in the industry, sometimes referred to as Continuous Professional Development. There are many advanced and more specialised qualifications an IFA may take throughout their career, and it can be worth asking about an adviser’s specific areas of expertise.

While the CertPFS qualifications are the minimum requirements, it is likely that an adviser will progress to the more advanced qualifications throughout their career. The level of qualification can therefore be a useful indicator of an adviser's experience and expertise.

If Things Go Wrong

Financial services are heavily regulated in the United Kingdom. While this may in some cases restrict the market and places a heavy burden on financial services professionals, it also makes for one of the safest consumer markets in the world.

If a client buys a financial product on the advice of an IFA which turns out to be unsuitable, they have the right to complain and, if the complaint is upheld, may receive compensation. All regulated financial services companies, including IFAs must have effective internal complaint handling procedures. If a complaint is not dealt with satisfactorily internally, the client has the option of going to the Financial Ombudsmen Service, which will conduct an independent investigation and has the power to award compensation if warranted. It should be noted that in a large majority of cases referred to the Ombudsmen, it finds that the firm had treated the customer’s complaint fairly.

This does not mean that a client can claim compensation simply because an investment loses money. With all investments, there is an element of risk, the basis for complaint would only be whether or not that level of risk was unsuitable for a particular client based on the information given to the adviser.

Execution-Only

In some circumstances an IFA will sell a financial product to a client without providing them advice. This is known as an execution-only service, and is often accompanied by a partial rebate of commission paid by the product provider. This form of sale can be useful when the client does not require advice, as they can often get better value by going through an IFA than if they went directly to the product provider. It can have problems however, since no advice is given, the client has no redress if they subsequently find the product to be unsuitable for them. This has formed the basis of several ‘mis-selling’ claims for certain classes of product.

Depolarisation

On 1st December 2004 the Financial Services Authority (FSA), the UK financial regulator, changed the rules governing financial advisors. Previously (under a system known as ‘Polarisation’) there were only two types of financial adviser, those who would advise and sell only one company’s products - known as a Tied Agent, and those who would advise and sell the most suitable products from the whole of the market – Independent Financial Advisers (IFA).

With Depolarisation, the FSA has changed this dramatically. A firm may now offer advice on products from just one provider (single tied), more than one provider (multi-tied) or from the entire marketplace (whole-of-market). Generally speaking, to be able to call itself "independent", a firm must offer its clients the option of paying for the advice by a fee and must be a whole of market adviser.

There are a few complications however :

A firm may hold themselves out as being whole of market for one class of product such as investments, but be multi-tied on another, for example pensions.
An adviser can start a relationship with a client as a single tied adviser, but can then broaden the scope of advice to multi-tie or whole of market advice (he cannot decrease the scope of advice he offers though). If he does this he must re-disclose his status to the client.

The regulations that introduced regulation for mortgages and general insurance (GI) were developed and introduced around the same time as the depolarisation rules (Mortgages 31 Oct 04, GI 14 Jan 05).

Look out for the adviser's regulatory documents; the 'Terms of Business Letter' , 'Keyfacts About Our Services' and 'Keyfacts About The Cost of Our Services'. These are very important and will clarify the nature of their status and commercial relationship with you. If you have agreed to remunerate the firm by fees, they will also normally clarify this by issuing a fee agreement letter.

These documents may also compare your adviser's charges (including commission) with those of other firms in the market. The data that the FSA collates to allow firms to create these figures has been subject to criticism. The FSA sources this data from life offices. The process that it uses to do this is new and no doubt will be refined with time.

External links

The IFA Defence Union An international IFA trade body that uniquely recognises retired IFAs and campaigns for human rights

Association of Independent Financial Advisers A trade body representing 70% of the UK IFA market

The Financial Ombudsman Service

The Financial Services Authority

The Chartered Insurance Institute Check their registers for Chartered title holders, including Chartered Financial Planners.

The Institute of Financial Planning Search for Certified Financial Planners - fee based financial advisers who meet the international standards in financial planning and adhere to the code of ethics and professional practice.

The Personal Finance Society Search for professional financial advisers by location, speciality and qualifications.

Unbiased.co.uk A UK IFA Industry Promotional Website with the function to search for an adviser by qualifications. Includes useful explanatory guides on a range of issues.

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