How Much Money Should You Have To Obtain Financial Advice?

The question gets asked often: is financial advice worthwhile? Implicit in this question is: how much money should I have to make financial advice worthwhile? The answer is that it does not depend on how much money you have but what your needs are and whether the advice will provide enough value to justify paying for it. However, there are many common misconceptions about financial advice and what level of service you are getting. The financial services industry is tailored towards people with money – so the more money you have, the more and better quality advice you would get. If you have no money, you have few options which is where the expression comes from; “no money, no advice”. Why is this? Advice is not charged for on its own: its value is combined with products that get sold. If you don’t buy any products, there are limited avenues for getting any advice. If you use a non-traditional approach to obtaining advice like doing it yourself, a money coach or a fee for service planner, you will have more options.

General Trends in the Traditional Advice Model

The more money you have, the more customized your advice, the more investment choices you have and the lower the fees are per each dollar invested. The total dollars paid in fees will rise as you invest more money in most cases. The choices you have will also expand for products offered and which institutions you can choose from. You will also obtain more holistic advice. This means you would have access to services such as legal advice, tax advice, estate planning, money management or business advice. If the amount invested is below $500,000, you may have to buy standard products which are the same for many people. This figure is a typical threshold for a “high net worth” client which means you have the best options of service above this amount. This limit will vary depending on who you invest your money with, but it is very common to segregate clients that are above or below this threshold.

Fees

In many cases, the fees charged are a percentage of how much money you invest. These fees can also be charged by how many trades you make, or a flat fee percentage based on how much money you have. There may also be fees for referring various products, or dealing with certain institutions. The time or work required to manage your money is usually not factored into the equation. As an example, if you have $10,000 or $1 million to buy into an individual stock, you can either buy 100 shares or 10,000 shares and it is the same amount of work to execute. There is an argument that 10,000 shares can be a large order, and so some thought has to be put into timing the order to get the best price. There is also the argument that if you have $1 million, there are many more options to explore which will require more work. There is truth to these statements, but there are also people with $500,000 buying a few mutual funds or index funds that are paying the same fees as a tailored made list of individual securities. The fee would include execution of trades, rebalancing and advice on each particular holding. The key thing is to find out what you are paying and what value it is producing for you. You should understand all of the fees and what the total cost is at the end of the day.

Investable Assets

Keep in mind that the assets being referred to here are investable assets. An investable asset is money that can be invested anywhere and that is transferable or liquid. Another way to think of this is that an investable asset has the ability to generate fees for the institution holding your account. A house for example would not be useful as you cannot invest part of your house in your trading accounts. If you take out a loan against your house and invest the money, this is possible but this has different types of risks which need to be understood. Rental properties, land, businesses, collectibles or other assets that are not readily available to hold in a trading account are other examples of assets that are not investable. Even though you own these assets and they have value, they are not available to generate fees and therefore would be excluded typically. There are cases where your net worth in total is being asked for, and discussing these assets does give you some advantage because they can indicate to the institution how much wealth you have and can be used as collateral in case your investments do not perform well. In the case of fee for service planning, money coaching and doing it yourself, all of your assets would be included because they are part of your investment situation.

Advice is Not Free

The vast majority of financial advisors and financial planners work on commissions. They can also receive fees from trading, referral fees or a percentage charged on the amount of assets in the customer’s account. These fees need to be calculated based on some quantifiable number. Advice is included with these transactions so its value is never itemized. Some institutions will tell you that advice is free. Advice is not free; it will be included in some other payment which is typically the products you buy or hold onto. If something is free and you cannot isolate how much is worth, it is hard to know if you are getting a good deal or if you are getting value for the money and time spent.

Assets Over $500,000

If you have more than $500,000 in investable assets, you can obtain some very detailed advice with a dedicated person. This $500,000 will depend on the institution and their asset minimums as well as what type of investments they have available. A general rule is that the more exotic or complicated the investments are, the higher the minimum amount of money the company would want. These minimums also depend on whether the company is managing your money by itself, or combining it with other people’s money in “pooled accounts” or “pooled funds”. Another variation on this theme is that the company will create some standard portfolios or “model portfolios” and you would buy units of these products. You would need to ask yourself if these pooled accounts or standard portfolios are much different than a product you can buy at a bank or a discount broker.

Assets Under $500,000

If you have under $500,000 in investable assets, you will likely be serviced by an “undedicated person”. Examples of this would be the customer service person at your bank, a call centre or a mutual fund representative. They would basically help you choose from a more limited range of products and process your order. The amount of advice is more limited to investment options and these are limited depending on which institution you go to.

No Assets or Debt

If you have no money saved, have debt or very small investment amounts, you will likely not be able to get advice from traditional channels. If you have debt, you are likely dealing with a bank or whoever you owe the debt to, and the fees are being made via interest. If you have neither debt nor assets, you are not paying money for an institution either way, so you would be targeted for savings plans, credit cards or incremental payment options. Advice on what you need for all of your financial needs is likely not forthcoming.

Do it Yourself

Some people get discouraged with the lack of advice or lack of options and decide to manage their money on their own. This is a viable strategy, however, it is a lot of work and you need to learn a lot of things before you can feel comfortable managing all aspects of your money. Courses are available as well as books and semi-nars that can be attended. Another variation of this theme is “trial by fire”. You can try various ways of doing something with respect to your money. When something works, you keep doing it and when it doesn’t, you try something different. This method will take a lot of trials, and you may lose a lot of money and waste a lot of time. You can also learn from other people’s mistakes and pay attention to other people’s stories to steer clear of land mines. This is very helpful to do when learning anything new, but it is likely not as efficient as first seeing what options are out there before making the trials. There are no asset minimums when you do things yourself, but in some cases you would not have access to certain products, or trading fees might make it too expensive to entertain trading strategies that have a lot of frequency or expensive share prices.

Fee For Service Planning

Fee for service planning charges you for the advice provided and not for the products sold. This removes a lot of barriers like how much money you have and what type of assets you have. You may have no money at all, but a sound financial plan may be what you need to obtain some savings and build that asset base. The knowledge may be more useful before you start handling the money than after a tirade of losses. It does not matter whether you have a business, real estate, a house or anything else – it is all part of the financial plan. Fees are not determined by the assets you have but by the work performed by the fee for service planner. This type of advice also may include tax advice, estate planning, budgeting and any other aspect of money depending on what the qualifications of the fee for service planner are. There is an element of “do it yourself” in executing the advice, because you would need to decide where you will put the money and what products to buy. There are ways of getting advice on this as well, but the customer would have to open the accounts and actually do the buying and selling of the products.

Money Coaches

If you want to focus more on the education aspect of your finances, you may obtain the services of a money coach. The name describes what they do very well in that a money coach will focus more time on motivation and education about your finances as opposed to the investing of the money. Retaining someone like this may enhance do it yourself efforts, or make you a more savvy customer if you follow traditional channels. There are also no limitations on what you have, how much you know or what specific areas you would need help with. There is also no issue with product selling as this would not typically be done with money coaches.

Combinations

Any of the above methods of handling money can be combined together. You may have a traditional lender, a traditional investment advisor as well as a money coach and fee for service planner. You may opt to do part of the work yourself, and leave some aspects to a professional. You may invest part of your assets yourself and have someone invest the rest of the assets. You may also enlist a money coach or fee for service planner as a starting point, a second opinion, or a double check of traditional channels. There is also a possibility of hiring a fee for service planner for advice with an investment firm for the investing aspect. This type of arrangement comes in many forms, so the relationship between the parties should be disclosed. In general, if you have multiple people engaged in your finances, make sure you understand what each person or institution is supposed to do and what you can expect. Arrangements can always be changed no matter how long they have existed.

Summary

The key to obtaining the proper advice for you is to understand how you are paying for the advice and what value you are receiving. Also make sure you know how much you are paying after everything is said on done and the return generated is in hand after fees and taxes. You would then explore the options for obtaining the advice and whether they are suitable for you or not. This is like shopping around for a household item – you will see different versions for different prices. You would ask what features are most suitable for you for the best price. You want to see how much you are paying in total and what value you are receiving net of costs compared to what you would like to receive. Thinking in this way will reveal a lot to you and allow you to consider more alternatives.

Established for over 30 years Linghams accountants in Cardiff provide a full range of accountancy and consultancy services for your business. They also offer business strategic planning and consultancy as well as full tax planning service.

Getting Financial Advice – How to Make Sure You Get the Right Advice For Your Personal Finances

Once you have identified your goals, it is time to find out how to best go about achieving those goals. The financial services industry is a complex business, and there are few of us who could be expected to navigate its murky waters without help.

Perhaps the most important decision you can make when considering buying any financial product or service is the decision on the kind of advice you will seek out.

This is an area where some care is required. As complex as the financial services industry is, so too are the relationships of those who work within it, and you must be sure you understand the relationship between the person giving you advice and the product they are advising you on.

Always remember that the primary purpose of such advice is to help identify what your needs are, not to encourage you to purchase specific products. It may be that the best advice is to do nothing. Sometimes, an adviser will appear to go to a great deal of trouble on your behalf, in the hopes of encouraging you to feel obliged to stick with them – always remember you can say NO.

The rights you are entitled to in receiving advice vary according to the type of product. Check with the appropriate independent authority (as defined in various places in this guide, and in the Useful Information section) as to what your rights are with regard to a given product.

If you choose to buy a product without seeking advice, your rights are often less than they might be otherwise. In some cases, the attitude is ‘you didn’t seek advice, so it’s your own fault’. While it may be appropriate in some cases to go it alone, getting good advice is always worth the investment.

What may seem like advice may not be – do not mistake information for advice! If you buy from a direct mail shot, through a website or from a ‘direct’ company, you may be considered to have not taken advice, as far as your rights go. Marketing material is not objective and impartial – an obvious point, but worth restating.

Broadly, the kind of advice you can get falls into two categories: independent and tied. Both have their advantages and potential pitfalls.

Tied Agents

Tied advisers generally sell and advise on the products of just one company. They may or may not work directly for that company – sometimes they simply have strong ties and a good working knowledge of that company’s products. They may be able to get access to a good deal because of their exclusive relationship with the provider.

They can tell you which of the company’s products suits your needs. They have a responsibility to advise you honestly, and if none of the company’s products suit your needs they should tell you so. But always be aware that they are not necessarily trying to advise you on the best over-all product for you, but rather the best product that the company itself has to offer you. They should not tell you a product is appropriate for you if it is not, but sometimes what is ‘appropriate’ can be a slippery concept.

Tied agents almost always work on commission, though there is some movement towards having advisers tied to specific companies working for a flat fee. You may find it more comfortable to seek out one of these companies.

Citizen’s Advice Bureau

The Citizen’s Advice Bureau (Website: http://www.citizensadvice.org.uk) is an independent charitable organisation that focuses on giving advice on a whole range of subjects.

They are able to offer help in regards to issues such as debt, your rights, and general consumer issues. However, certain bureaux can offer specialist advice, often in conjunction with professional partners such as solicitors.

If things go awry, the CAB can help you to determine a way forward. They will help identify what your rights are, how to move forward with the issues, what kind of back up you can expect from various bodies etc.

The Financial Services Authority

The FSA is an independent non-governmental body that has statutory powers to regulate the financial services industry. Their funding comes from the industry itself, but the Treasury appoints the board. The FSA is guided by the Financial Service And Markets Act (Website: http://www.fsa.gov.uk), which came into force in June 2000.

One of their primary purposes is to secure the appropriate degree of protection for consumers. With this in mind they provide an excellent consumers guide that provides information on such things as consumer alerts, what to do if you have a complaint, a suite of comparative tables of similar financial services and even a firm check tool to find out if a company you are considering using are reputable and accredited.

Independant Financial Services

An independent advisor can nominally give you advice without you having to worry that they are pushing you towards a product that isn’t right for you. If they are not tied to using products from a particular company, they are free to look at the various products on offer, and make suggestions based on what is best for your particular circumstances.

They can give advice on a variety of products. If they give advice on investments such as pensions, life insurance, unit trusts and shares, then they and the company they work for must be authorised by the Financial Services Authority, and must abide by their code of conduct. Those advising on loans, most mortgages, non-investment (‘general’) insurance, term insurance or bank and building society accounts need not currently be authorised, though from 31st October 2004 all mortgage advisors will have to register and be authorised by the FSA. From early 2005, general and term insurance advisors will also have to be authorised.

If you want to check to see whether a person or firm is authorised by the FSA, you can use their Firm Check Service.

Some care has to be taken when taking such advice. While an advisor may not work directly for a particular company, they do often have relationships with companies (sometimes with a suite of companies). Often companies will offer bigger commissions or other such inducements to advisors in the hope that that will encourage them to promote their product.

The only truly independent financial advice you can get is when the advisor has no stake in your final choice of product. This can only come about if you get advice from one source, and buy your product or service from another with no connection between the two.

However, financial services often will prefer one product over another because those products genuinely are better than their competitors – the advisor’s reputations is founded on giving the right advice and achieving good results over time. In a sense, the advisor acts as a filter, discarding poorly performing or sub-standard products and focusing on the products that do perform.

When considering what advice to take, always establish what the point-of-view of your advisor is, and how that will affect the kind of advice they give.

You pay advisors in one of three ways: a one-off fee, a commission on any products bought, or a combination of the two. Always establish from the start what the deal is. The Financial Services Authority has decreed that from late 2003 all independent financial services must let you pay them with a flat fee if you wish to. This removes the temptation to recommend a product that pays them better commission.

Finally, it is always worth asking whether the advisor will be prepared to take a cut in their commission in order to give you a better deal (called a ‘commission sacrifice’). They won’t always agree, but if you don’t ask you certainly won’t get. Sometimes they will consider it worthwhile in order to get your custom.

Avoid Common Pitfalls Of Taking Financial Advice

The short answer is to use an Independent Financial Advisor, investigate them thoroughly and make sure you understand any product you buy.

However many people are unsure exactly what is a Independent Financial Advisor or IFA so I will explain the types of Financial Advisor, how an Independent Financial Advisor is different from the other types of advisor and their obligations to a client.

What is a Independent Financial Advisor?

An Independent Financial Advisor (IFA) provides financial planning, offers unbiased advice and recommends suitable financial products from the entire UK market.

All IFAs are regulated by The Financial Service Authority (FSA) which requires them to hold strict qualifications and show a high level of competence.

The term Independent Financial Advisordates from 1988 when the UK government introduced a polarisation regime where an Advisor was either tied to a single insurer or was an independent practitioner.

Since 2005 the UK market has been depolarised. There are now four type of Advisor.

  • Independent financial Advisors who work with products from the whole of the financial market and allow their customers the option of paying by fee or commission.
  • Whole of market Advisors, who work with one company but only on a commission basis.
  • Multi tied – work for more then one financial organisation.
  • Tied – work for one organisation, typically a high street bank.

When Choosing a Financial Advisor ask whether he or she is independent, multi-tied or tied.

What qualifications does a Independent Financial Advisor need?

There are no set entry requirements for becoming a financial Advisor. Many employers consider a strong background in sales, financial services or customer service to be more important than formal qualifications. However for a person to be allowed to practise as an Independent Financial Advisor the Financial Services Authority (FSA), requires the following qualifications.

The entry level qualifications are the

  • Financial Planning Certificate
  • Certificate in Financial Planning (CertPFS

Both are issued by Chartered Insurance Institute (CII) and are about equivalent to a challenging GCSE. Treat them accordingly.

The most common advanced qualifications are

  • Advanced Financial Planning Certificate (AFPC)
  • Certified Financial Planner licence.

IFAs with higher level professional qualifications may have the letters APFS or FPFS after their names.

What about high level professional qualifications?

The highest professional status for a IFA is a Chartered Financial Planner which was recently introduced.

In addition to these qualifications the FSA requires all IFA to undergo Continuous Professional Development (CPD) to keep upto date with developments in the profession.

Throughout their career an IFA may take many advanced and more specialised qualifications to develop specific areas of expertise. You should ask your IFA about them because he or she will gain the more advanced qualifications as their career progresses making qualifications a useful benchmark of an Advisor’s specific expertise and experience.

How are Independent Financial Advisors paid?

The vast majority of IFAs are paid by commission either in full or in part. The obvious problem with this is that the product offering the best commission may not be the best product for your interests.

The FSA recognised that this might be a problem and since depolorisation of the market in 2005 has required a financial advisor to provide clients the choice of either paying commission or a fee for advice. Despite the conflict of interest, consumers have been reluctant to pay for something they see that they already get for free.

Today there are three main ways an IFA receives payment.

  • Commission: Typically the advice of the IFA is paid for by a commission from the product provider. The size of the payment must be made known to the client. It is possible to obtain a rebate of part of an IFAs commission in some circumstances, most commonly in Execution-Only cases. The size of commission and whether it is included in the price of the investment or deducted from the amount you invest depends on the product. This is not free advice. The client pays for the commission in the cost of the product.
  • Fees: Offered by all IFAs, this can be cheaper than paying commission if the product is large, complex or specialist. Paying a fee for advice removes any incentive for an IFA to recommend a wrong product. This makes it a good way to ensure that the advice is impartial.
  • Combination: It is possible use a combination commission and fees. The IFA will refund part of the advice fee when a product is bought..

It is usually easy to find the cheapest option for each investment because the FSA require that the size and type of any payment to an IFA are made known to a client.

What are an Independent Financial Advisors obligations to a client?

FA are obliged by the FSA to provide the most suitable advice for your particular personal objectives, situation, requirements and appetite for risk.

To do this they usually conduct a “factfind” of a your financial position , preferences and objectives. It is important to be frank and open about your financial situation during this process. This is much easier if you have a personal rapport with your IFA. Using a well planned system for Choosing a Suitable Financial Advisor help make this more likely. Once the fact-find is done they are able to advise the most appropriate action need to meet the objectives and possibly recommend a financial product.

The FSA requires every IFA to tell you about the service they’re offering and provide you a “Keyfacts- about our services” document. Insurance brokers may give you this information in another format. The document describes

  • the service on offer;
  • whose products they choose from; and
  • whether you’ll have to pay a fee for the service or if they’ll get paid by commission on what they sell you.

“This document is important – it can help you shop around and compare services, product ranges and costs, so make sure you are given one and if you’re not, ask for one.”

How to go about Finding a Financial Advisor

You can ask family of friends for a recomendation of someone they trust. Alternatively you can ask another professional you have experience of dealing with for a refferal. Professionals tend to know other profesionals and a have an opinon about them.

You can investigate any IFAs before doing business with them. Check that the firm is on the FSA Central Register and is allowed to give financial advice, .

  • The Central Register is available on the FSA website at
  • You can also make checks over the phone on 0845 606 1234.

In summary

Although the UK consumer financial market is among the most heavily regulated and thus the safest in the world, It is your responsibility to understand the terms on which you do business.

You can avoid many of the most common pitfalls by following these steps.

  1. Only use an independent financial advisor listed on the Central Register
  2. Choose an IFA you feel comfortable with.
  3. Ask them about their qualifications and specialist areas expertise and choose on suitable to meet your goals.
  4. Investigate whether you are better paying a fee rather then a commission.
  5. Before purchasing a product or signing anything you must make sure you understand what you are being told.
  6. Read the “key facts” documentation they will provide you. If they dont provide this, ask for it.
  7. If you are unsure about something clarify it.