What is an IFA
The people you can buy financial products like pensions from break down into three main categories.
Tied Agents: are tied to a particular company eg they are an employee of a large pension provider in which case they would only be selling that company's range of life insurance, mortgages, pensions etc.
Appointed Representatives: are self employed agents who only deal with one pension provider eg they have a High St. office with their own name, so look like a genuine IFA but they'll only recommend one pension provider. By law they have to make this clear to you
The Genuine Independent Financial Advisor.
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Why using an IFA is best
The new Stakeholder pension is a simple, cheap and flexible type of pension which was designed to improve things for the public
It really would be the best buy for most people and in some respects makes the IFA less relevant than in the bad old days of high charging, inflexible pensions when you needed one to steer you through the minefield
IFAs don't really make enough money from Stakeholders to bother dealing with them - unless you're paying a fee. However personal finance is always dangerous ground so it may be a good idea to consult an IFA about which Stakeholder to get. They know about the histories of the pension providers and can use their experience to steer you away from poor performers.
Whatever you're consulting them about, the IFA has to give you "Best Advice" BY LAW
This means gaining a complete understanding of your particular circumstances before deciding which pension plan is the best for you.
After the pension selling scandals anyone selling a pension has to ensure they have fulfilled various criteria including a detailed questionnaire ("the fact find") which they have to go through the pension buyer.
While it's still possible for an unscrupulous IFA to sell you a product that's really more in their interest than yours (ie they get more money for it), if anything goes wrong you are much more likely to be able to claim compensation.
The IFA assesses all of your circumstances and makes recommendations from all the pension providers in the market. There are a huge number of products to choose from, and the IFA can easily see which ones are best for you - not least because there are several computer programmes they can subscribe to which do all the research for them.
If you go for the perhaps cheaper option of Direct pension providers - where you buy your pension by Execution Only - then, because you chose the pension yourself, if things goes wrong, you've nobody else to blame and would be much less likely to be able to claim any compensation later on. (Unless the pension provider went out of business, where you'd be covered by the Policy Holders Protection Act).
The IFA should be genuinely independent and have your interests at heart and not the interests of an insurance / pension company or their own commission.
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Choosing an IFA
We would recommend that you choose a local firm of IFA's with a good track record and an experienced, mature person at the helm.
Ideally you want a word of mouth recommendation but the problem with this is that people don't necessarily know how good or bad their IFA may be at giving financial advice as opposed to being a charming person to know. And one thing an IFA is likely to be is charming... (See Watch out for the charmers).
Unlike the tied agent and the Appointed Representatives, the IFA really has to know the whole market and give you best advice. If they haven't, further down the line you should be able to get compensation.
You want someone who's taking the long term view of their career as an IFA. It really is in their interests to give you the best service because they'll want you to recommend them to your friends and relatives.
Avoid anyone who seems at all "fly by night". While there are very few fast buck merchants around always watch out for them. Trust your instincts. Remember that the basis of the law is "buyer beware".
An IFA will usually see you free initially and then charge either an hourly fee - from £30 to £100 - or you can agree on them taking a commission. This normally comes from the company whose products they have recommended. (But you will most likely be paying for this as part of your pension's charges - though some of the stakeholder pension providers are giving commissions to IFAs as "loss leaders" ie you won't be paying for them. To read more about this now see Fees versus commission.
If you don't have any other way of finding an IFA, we've been approached by a firm who seem to be reasonable people. Clearly they're interested in getting your business, but they'll speak to you and give a quote on an initial free, no obligation basis. (Click here to contact them now).
Also see Watch out for the charmers.
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Questions to ask your IFA
- Do you usually deal with someone in my earnings range ? (If IFAs only deal with wealthy individuals, as some do, they may not give you the right attention).
- How long have you been in business for ?
- What qualifications do you have ?
- Are you truly independent ?
- Who are you regulated by ? Usually the Financial Services Authority. Solicitors and accountants acting as IFA's should be regulated by the Law Society or the Institute of Chartered Accountants. If they sell over a certain amount then they too have to be registered with the FSA. (see How to check up on an IFA)
- What parts of personal finance do you specialise in ? (e.g. they may they deal in mortgages, investments, life insurance, health insurance - ideally you want a pensions expert).
You may find that it's wise to judge your IFA's on how they deal with your questions. Directly? Or do you have difficulty in getting a straight answer. Any good IFA should come over as straightforward and honest. If they don't specialise in pensions they should be mature enough to know that recommending a more suitable IFA to you is good business all round.
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Fees versus commission
The number of fee based IFA's has grown rapidly in recent years. The idea with fees is that you pay these charges up front so that there's no suggestion that the IFA is reliant on any commission for the pension plan they recommend i.e. the advice is genuinely independent.
The standard charge at the time of writing is £75 an hour (usually after a free initial meeting). But when you've added all the letters and follow up you may find that paying commission would have been cheaper.
The IFA should be able to give you a quote. But it's most likely to be an estimate and the problem is, you see, that no one's finances are as simple as may first appear... Alternatively they may charge on a transaction basis e.g. you pay a set amount for a report. Though remember, if you don't follow the IFA's advice you're still paying for it.
Many IFA's will give you a guaranteed fee ceiling.
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IFA Qualifications
The Financial Planning Certificate (FPC) is the bench mark qualification and comes in three parts. Any salesperson (e.g. a tied agent) needs part one to sell pensions BY LAW.
You can give advice under strict supervision e.g. by your company if you've only got part one. However to be a fully-fledged IFA you must have parts 2 & 3 as well.
The IFA will usually place their relevant qualification after their name. Many don't bother putting "FPC" but may put one of the following abbreviations:
AFPC Advanced Financial Planning Certificate
ALIA (Dip) Associate of the Life Insurance Association
MLIA Member of the Life Insurance Association
FLIA Fellow of the Life Insurance Association
AIFP Associate of the Institute of Financial Planning
FIFP Fellow of the Institute of Financial Planning
AIFA Associate of the Institute or Faculty of Actuaries
FIFA Fellow of the Institute or Faculty of Actuaries
CFP Certificate of Financial Planning
Also there's the:
Securities Institute Diploma
BA or MA in Financial Services
(Note. These are not all the qualifications available and they're not listed in order of prestige).
While further qualifications to the FPC aren't everything and aren't necessarily a guarantee of good service, at least they indicate that the IFA is serious about their career and taking a long-term view
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Who regulates IFAs
The Financial Services Authority (FSA) vet IFA's who must demonstrate professional competence by passing exams and agree to follow strict rules. If an IFA breaks the rules she / he faces tough action and risks being debarred from business altogether.
The FSA took over from The Personal Investments Authority in 2001 and are seen as a much tougher regulator.
They regularly visit IFAs offices. Perhaps a good sign for the public is that IFAs tend to hate them.
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How to check up on an IFA
The FSA have a register of IFA's.
Call their Consumer Helpline on 0845 606 1234 and they will quickly tell you what qualifications your IFA has and what type of advice she / he's allowed to give you.
They also have an "Industry Helpline" which you could use to check up on a firm of IFAs. Tel 0897 334 455
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Complaining about IFA's
If you have a complaint about an IFA write to the FSA.
The FSA publishes a guide on how to complain.
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Other Ways to Buy Pensions
Tied Agents
Tied agents are tied to a particular company i.e. they are an employee of a large insurer / pension provider - say Norwich Union, in which case they would only be selling Norwich Union's products.
Appointed Representatives
Appointed Representatives are self employed agents who only deal with one pension provider. i.e. they have a High St. office with their own name, so look like a genuine IFA but they'll only recommend one pension provider.
By law they have to make this clear to you.
Solicitors and Accountants
useful addition to income for some lawyers and accountants is selling personal financial services. One should perhaps be more wary of these non-specialists who, despite having more cudos than your average IFA, probably have much less expertise in personal finance.
While they do not want to get into trouble with their respective regulatory bodies, experience shows that they would have to do something serious to be disbarred.
Then again if they sell over a certain number of personal pensions they become regulated by the FSA and would need the same qualifications as an IFA.
Ask them the same Questions to ask your IFA.
Some of the larger firms have their own dedicated IFA's who are likely to be of a high standard and would usually work on a fee basis and therefore unlikely to be "commission driven".
Stockbrokers
Also sell investment products to the wealthier.
They started to be regulated by the FSA from around summer 2000.
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Execution Only
This is where you choose a pension yourself and pay an IFA or pension provider to register it for you.
You'd pay a fee - the cheapest at present are around £99 - but you must make sure that there aren't further charges e.g. the pension provider may charge commission, as if it had been through a salesperson, but which it keeps as pure profit.
You'd also need to be clear on what the future / ongoing charges will be.
Besides the need for detailed research (which you really should do before taking this route), the major disadvantage is that because you chose the pension yourself, you've nobody to blame and will be highly unlikely to be able to claim any compensation later on. (Unless the pension provider went out of business, where you'd be covered by the Policy Holders Protection Act).
Buyer beware!
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