Independent Financial Adviser
Encyclopedia
Independent Financial Advisers or IFAs are professional
s who offer independent advice on financial
matters to their clients and recommend suitable financial products from the whole of the market. The term was developed to reflect a UK regulatory position and has a specific UK meaning, although it has been adopted in other parts of the world, such as Hong Kong
.
The term "Independent Financial Adviser" was coined to describe the advisers working independently for their clients rather than representing an insurance
company, bank or bancassurer
. At the time (1988) the UK
government was introducing the polarisation regime which forced advisers to either be tied to a single insurer or product provider 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 three main classes of adviser: tied advisers (working for one financial institution), multi-tied advisers (offering products from a selection of the market and usually paid on a commission
basis) and independent financial advisers. Independent financial advisers must offer their clients the option to pay for advice by fee as an alternative to 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
, protection and mortgages
(or other loan
s). IFAs also advise on some tax
and legal matters.
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 advice on which financial product to buy, the transition to fee based advice by IFAs has been slow and concentrated in the 'high net worth sector'.
The FSA
has introduced a new disclosure regime for advisers giving regulated investment advice on retail financial products. Since July 2005 this regime insists that advisers who market themselves as independent must offer the option of paying a fee for advice on which 'appropriate' financial product to buy. The four main remuneration options available for financial advisors are as follows:
There are requirements for the type and amount of payments to IFAs to be clearly disclosed, so it would normally be easy to determine the cheapest option for a particular commission-paying financial product such as an investment.
Marketing costs such as commission increase the annual charges on financial products by a significant amount (ref: Sandler Review
).
(FSA). The FSA require that firms ensure that individuals acting for them have appropriate qualifications. The list of appropriate qualifications is determined by the Financial Services Skills Council at the behest of the FSA.
The qualifications for most firms relate to Chartered Insurance Institute
(CII) exams past and present.
The entry level is normally the historic 'Financial Planning Certificate' (FPC), or its successor, the 'Certificate in Financial Planning' (CFP) which includes an additional examination focusing on investment advice and risk. For the payment of a fee to the Personal Finance Society
members with this level of qualification may use the CertPFS designation. The exams to achieve this are certificate level as designated by the Qualifications and Curriculum Authority (QCA) each exam is approximately equivalent to a GCSE (five for CFP and three for FPC).
The next level is the historical 'Advanced Financial Planning Certificate' (AFPC) and newer 'Diploma in Financial Planning' (DFP). Again for a fee members of the Personal Finance Society may use the designation DipPFS.
The next level is 'Advanced Diploma in Financial Planning'.
The highest level is 'Certified Financial Planner
' (CFP) issued by the Institute of Financial Planning or Chartered Financial Planner
status granted by the CII.
All IFAs also have an obligation to keep up with current developments in the profession, 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. With the introduction of higher qualifications becoming more important, the level of qualification can therefore be a useful indicator of an adviser's expertise, although a great deal of experienced advisers currently offer a greater deal of practical knowledge than those obtaining qualifications rapidly in a corporate training ground.
In addition to that, recently a project was managed by the Financial Services Skills Council (FSSC) - to assess the various types of IFA Qualifications.
All qualifications / designations have been assigned a level based on an analysis which was completed by UK NARIC, a national DfES agency which provides guidance on levels of international qualifications (academic, vocational and professional). A list of these qualifications was compiled at IFA Promotion
and split up into two levels (A & B).
. Membership of an IFA Network qualifies an IFA as being exempt from regulation. The IFA Network is then responsible for the advice and regulatory compliance of its members.
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 Ombudsman Service
, which will conduct an independent investigation and has the power to award compensation if warranted. In a large majority of cases referred to the Ombudsman, 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. This is particularly important (and not well-understood in the public consciousness), and especially in relation to the sale of with profits endowments intended to be used to repay an interest only mortgage. A great many people saw strongly reduced investment returns from their endowments due to lower interest rates (and hence investment returns) and subsequently claimed that they had been mis-sold. While the poor performance is regrettable, it in no way constitutes mis-selling in the legal sense unless it can be shown that the endowment was unsuitable for the client's needs at the time it was advised. It is not possible to use retrospective judgements to assess decisions made in good faith in the past either.
(FSA), the UK financial regulator, changed the rules governing financial advisers. 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 :
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).
all allow users to search for local IFAs among their member base. Which? Local and VouchedFor.co.uk both allow users to search for local IFAs and read reviews from past users.
Professional
A professional is a person who is paid to undertake a specialised set of tasks and to complete them for a fee. The traditional professions were doctors, lawyers, clergymen, and commissioned military officers. Today, the term is applied to estate agents, surveyors , environmental scientists,...
s who offer independent advice on financial
FINANCIAL
FINANCIAL is the weekly English-language newspaper with offices in Tbilisi, Georgia and Kiev, Ukraine. Published by Intelligence Group LLC, FINANCIAL is focused on opinion leaders and top business decision-makers; It's about world’s largest companies, investing, careers, and small business. It is...
matters to their clients and recommend suitable financial products from the whole of the market. The term was developed to reflect a UK regulatory position and has a specific UK meaning, although it has been adopted in other parts of the world, such as Hong Kong
Hong Kong
Hong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
.
The term "Independent Financial Adviser" was coined to describe the advisers working independently for their clients rather than representing an insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
company, bank or bancassurer
Bancassurance
The Bank Insurance Model , also sometimes known as 'Bancassurance', is the term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products.BIM allows the insurance company to...
. At the time (1988) the UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
government was introducing the polarisation regime which forced advisers to either be tied to a single insurer or product provider or to be an independent practitioner. The term is commonly used in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
where IFAs are regulated by the Financial Services Authority
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
(FSA) and must meet strict qualification and competence requirements.
In the UK the industry has been de-polarised since 2005. There are now three main classes of adviser: tied advisers (working for one financial institution), multi-tied advisers (offering products from a selection of the market and usually paid on a commission
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
basis) and independent financial advisers. Independent financial advisers must offer their clients the option to pay for advice by fee as an alternative to 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
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
, retirement planning
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
, insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
, protection and mortgages
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
(or other loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
s). IFAs also advise on some tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
and legal matters.
Paying for advice
Some financial advice is about investments and pensions: and some of these are 'financial products' packaged and marketed by financial institutions: and most of them pay commission. In the UK it is common for IFAs to limit the advice they give to commission-paying financial products. Traditionally IFAs have relied upon commission to pay for their services. In recent years there has been a shift towards feeFee
A fee is the price one pays as remuneration for services. Fees usually allow for overhead, wages, costs, and markup.Traditionally, professionals in Great Britain received a fee in contradistinction to a payment, salary, or wage, and would often use guineas rather than pounds as units of account...
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 advice on which financial product to buy, the transition to fee based advice by IFAs has been slow and concentrated in the 'high net worth sector'.
The FSA
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
has introduced a new disclosure regime for advisers giving regulated investment advice on retail financial products. Since July 2005 this regime insists that advisers who market themselves as independent must offer the option of paying a fee for advice on which 'appropriate' financial product to buy. The four main remuneration options available for financial advisors are as follows:
- Commission: Traditionally the most common way to pay for advice on financial products 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 actually invested or is included in the cost of the investment varies from product to product. The client pays for commission from product charges. As well as the initial commission, the adviser is likely to be also paid an annual "trail" commission by the product provider. Not all products offer the same rate of trail commission and therefore a potential conflict of interest may arise. The products making the highest management charges usually offer the adviser the highest trail commission. Financial products paying any trail commission will usually carry higher annual charges than investments which do not.
- Fees: Less common than commission, IFAs must offer the option of giving advice on financial products by working for a fee. The IFA is not bound by FSA regulations to include advice on those investments and pensions which do not pay commission. Depending on the size and type of the investment, and the complexity of the advice, paying an IFA by way of a fee can work out cheaper than paying commission. Paying a fee for advice can mean that the IFA is not influenced to recommend one packaged product over another simply because one pays more initial commission than another.
- Combination: It is also possible to pay a combination of fees and commission. In this situation the IFA may rebate a proportion of the commission they would have been due, or they may charge fees for advice and commission for transactions.
- Fee-Only: In economies that have developed financial planning (e.g. the USA, Canada, Holland) the phrase fee-only refers to a method of advice where the advising firm receives no commission at all and is paid entirely by individual. Unfortunately the Financial Services Authority uses the term in the context where it is clear the advising firm may also accept commission (referred to above as 'Fees' and 'Combination'). Financial advisory firms in the UK that are fee-only in the international definition contend that paying for advice from a firm which accepts commission will cause a conflict of interests.
There are requirements for the type and amount of payments to IFAs to be clearly disclosed, so it would normally be easy to determine the cheapest option for a particular commission-paying financial product such as an investment.
Marketing costs such as commission increase the annual charges on financial products by a significant amount (ref: Sandler Review
Sandler Review
In 2001 the United Kingdom Government asked Ron Sandler to:*Identify the competitive forces driving the retail financial services industry; and*Suggest policy responses to ensure that customers are well served.-Proposals:...
).
Qualifications
To offer financial advice an individual must represent or be an appointed representative of a firm registered with the Financial Services AuthorityFinancial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
(FSA). The FSA require that firms ensure that individuals acting for them have appropriate qualifications. The list of appropriate qualifications is determined by the Financial Services Skills Council at the behest of the FSA.
The qualifications for most firms relate to Chartered Insurance Institute
Chartered Insurance Institute
The Chartered Insurance Institute is a United Kingdom based professional organisation for those working in the insurance and financial services industries....
(CII) exams past and present.
The entry level is normally the historic 'Financial Planning Certificate' (FPC), or its successor, the 'Certificate in Financial Planning' (CFP) which includes an additional examination focusing on investment advice and risk. For the payment of a fee to the Personal Finance Society
Personal finance society
The Personal Finance Society is a British professional organisation of individual financial advisors and those in related roles.The Society was formed in January 2005, from the merger of the Life Insurance Association with The Society of Financial Advisors. It is part of The Chartered Insurance...
members with this level of qualification may use the CertPFS designation. The exams to achieve this are certificate level as designated by the Qualifications and Curriculum Authority (QCA) each exam is approximately equivalent to a GCSE (five for CFP and three for FPC).
The next level is the historical 'Advanced Financial Planning Certificate' (AFPC) and newer 'Diploma in Financial Planning' (DFP). Again for a fee members of the Personal Finance Society may use the designation DipPFS.
The next level is 'Advanced Diploma in Financial Planning'.
The highest level is 'Certified Financial Planner
Certified Financial Planner
The Certified Financial Planner designation is a professional certification mark for financial planners conferred by the Certified Financial Planner Board of Standards, Inc...
' (CFP) issued by the Institute of Financial Planning or Chartered Financial Planner
Chartered Financial Planner
The title Chartered Financial Planner is the most widely accepted "gold standard" qualification available for professional financial planners/ financial advisers in the United Kingdom. At the end of November 2010 there are over 2,000 individuals who hold the title Chartered Financial Planner...
status granted by the CII.
All IFAs also have an obligation to keep up with current developments in the profession, 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. With the introduction of higher qualifications becoming more important, the level of qualification can therefore be a useful indicator of an adviser's expertise, although a great deal of experienced advisers currently offer a greater deal of practical knowledge than those obtaining qualifications rapidly in a corporate training ground.
In addition to that, recently a project was managed by the Financial Services Skills Council (FSSC) - to assess the various types of IFA Qualifications.
All qualifications / designations have been assigned a level based on an analysis which was completed by UK NARIC, a national DfES agency which provides guidance on levels of international qualifications (academic, vocational and professional). A list of these qualifications was compiled at IFA Promotion
IFA Promotion
Unbiased.co.uk is an agency which provides legal and financial advisory information services run by an independent non-profit body. The organisation was founded as IFA Promotion in 1989 by 19 financial product providers whose main objective was to sell financial products to consumers via...
and split up into two levels (A & B).
IFA Network
IFA Network is an association of IFAs. All financial advisers in the UK must either be authorised or exempt under the Financial Services and Markets Act 2000Financial Services and Markets Act 2000
The Financial Services and Markets Act 2000 is an Act of the Parliament of the United Kingdom that created the Financial Services Authority as a regulator for insurance, investment business and banking.-Outline:...
. Membership of an IFA Network qualifies an IFA as being exempt from regulation. The IFA Network is then responsible for the advice and regulatory compliance of its members.
If things go wrong
Financial servicesFinancial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
are heavily regulated in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. 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 Ombudsman Service
Financial Ombudsman Service
The United Kingdom's Financial Ombudsman Service is an ombudsman established in 2001 as a result of the Financial Services and Markets Act 2000 to help settle disputes between consumers and UK-based businesses providing financial services, such as banks, building societies, insurance companies,...
, which will conduct an independent investigation and has the power to award compensation if warranted. In a large majority of cases referred to the Ombudsman, 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. This is particularly important (and not well-understood in the public consciousness), and especially in relation to the sale of with profits endowments intended to be used to repay an interest only mortgage. A great many people saw strongly reduced investment returns from their endowments due to lower interest rates (and hence investment returns) and subsequently claimed that they had been mis-sold. While the poor performance is regrettable, it in no way constitutes mis-selling in the legal sense unless it can be shown that the endowment was unsuitable for the client's needs at the time it was advised. It is not possible to use retrospective judgements to assess decisions made in good faith in the past either.
Execution-only
In some circumstances an IFA will arrange 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 1 December 2004 the Financial Services AuthorityFinancial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
(FSA), the UK financial regulator, changed the rules governing financial advisers. 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).
Finding an Independent Financial Adviser
Which?, the UK consumer campaigning charity, suggest several sources for individuals seeking an Independent Financial Adviser. The FSA Register allows users to confirm an IFA is properly authorised. Unbiased.co.uk, the Institute for Financial Planning and the Personal Finance SocietyPersonal finance society
The Personal Finance Society is a British professional organisation of individual financial advisors and those in related roles.The Society was formed in January 2005, from the merger of the Life Insurance Association with The Society of Financial Advisors. It is part of The Chartered Insurance...
all allow users to search for local IFAs among their member base. Which? Local and VouchedFor.co.uk both allow users to search for local IFAs and read reviews from past users.
See also
- Financial advice
- Financial adviserFinancial adviserA financial adviser, is a professional who renders financial services to individuals, businesses and governments. This can involve investment advice, which may include pension planning, and/or advice on life insurance and other insurances such as income protection insurance, critical illness...
s - Financial Planner and Financial PlanningFinancial plannerA financial planner or personal financial planner is a practicing professional who helps people deal with various personal financial issues through proper planning, which includes: cash flow management, education planning, retirement planning, investment planning, risk management and insurance...
- UK Pension ProvisionUK pension provisionPensions in the United Kingdom fall into seven major divisions; Basic State Pension, State Second Pension , Occupational Pensions, Stakeholder Pensions, Group Personal Pensions and Personal or Individual Pensions...
- Self-invested personal pensionSelf-invested personal pensionA Self-Invested Personal Pension is the name given to the type of UK-government-approved personal pension scheme, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue & Customs ....
s - Collective investment schemeCollective investment schemeA collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...
s
External links
- AIFA - Association of Independent Financial Advisers - UK Trade body
- IFAAA - Independent Financial Advisers Association of Australia A guide to choosing an IFA