How to choose a financial adviser

“After I spoke to my financial adviser I slept like a baby.

I woke up every hour and cried.”

Finding a financial adviser – one that doesn’t make you sleep like a baby – can be like finding a needle in haystack.

Even figuring out what you need to look for when deciding how to choose a financial adviser can be a task in itself.

It can take so much due diligence, in fact, that a common saying among the DIY investing crowd is that “once you’ve learned enough to pick a financial advisor, you won’t need one”.

And in some cases, this is true.

As I mentioned in this post on the 8 reasons to hire a financial adviser, not everyone needs an adviser – especially those who are investment savvy and who don’t have a complex financial life. But if you are in the market for an adviser, separating the competent and trustworthy from the mediocre and snake-oily can be tricky.

This problem is particularly rife in the financial advice world, since (in my experience) the ratio of truly good advisers to mediocre/poor ones skews so heavily against the good.

It’s the perfect industry for mediocre or downright unscrupulous actors to navigate, as it comes with the inauspicious combination of low barriers to entry (in the form of minimal formal qualifications required), high earnings potential (thanks to being given access to clients’ full financial lives), and the potential for misaligned incentives (generating money for the adviser is often at odds with generating money for the client).

Thankfully the increasing levels of regulation around financial advice in recent years has helped mitigate the more blatant conflicts of interest, but it’s still not easy to discern the good from the bad from the rip-your-face-off when it comes to advisers.

Since someone selecting an adviser at random has a high chance of picking a lemon (if we define a lemon as an adviser ranging anywhere between average and poor), and the cost of picking a lemon is so high (it’s often your life’s savings at stake), it’s incredibly important to make sure you properly vet your adviser before you hire them.

In many cases, your adviser will have more control over your financial life than anyone else, aside from maybe your spouse. And yet most people spend less time interviewing their potential advisers than they spend researching their next holiday.

So that’s what this post is for. To help provide a framework for selecting a competent and trustworthy financial adviser.

It’s obviously not guaranteed that by following these steps you’ll end up with a great one – but it at least helps skew the odds in your favour. And don’t get me wrong, great financial advisers do exist.

Before we get stuck in, I need to be clear that I’m not a financial adviser, nor have I ever employed one. I work as an investment manager, and my contact with advisers is through either my company having them as clients, or by speaking to private clients who themselves use advisers. My knowledge is based on second-hand testimony, combined with good old-fashioned independent research.

If you’ve had an experience with an adviser which you think others might benefit from hearing about, please let me know in the comments below. I intend this article to be periodically updated to help new readers, so if you have something worth sharing, I can update this article with any advice from your experience.

How to choose a financial adviser

Contents

• Types of financial adviser
• Types of financial adviser fees
• Questions to ask your financial adviser
• Where to find a financial adviser
• What if things go wrong?

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Types of financial adviser

Financial advisers are broadly split into two categories – independent and restricted.

Independent Financial Advisers

An independent financial adviser (IFA) is one who’s able to advise and sell products from any provider across the market.

Restricted Financial Advisers

A restricted financial adviser, however, can only recommend certain products or services to you. The extent of the restriction can vary depending on the adviser. Some will be restricted by products they advise on (not always bad), and some by provider (often bad, as other providers may have better deals). For example, the advisers of large advice firms including St. James’ Place and Quilters are restricted to only offering products and services provided by their companies.

In theory, a restricted adviser should be honest and let you know if the products they’re selling aren’t suitable. After all, they’re still covered by regulations governing advice suitability.

In practice, though, there’s plenty of wiggle-room for what’s considered ‘suitable’, and it’s especially difficult to know if you could be getting a better deal elsewhere. As a good rule of thumb, an adviser will always recommend whatever’s in their best interests – which, unless it’s blatantly inappropriate and risks them being sued for offering it (i.e. it’s in their best interest not to offer it), their recommendation will inevitably be something from their restricted list of offerings.

For those seeking advice, especially those receiving it for the first time, it’s a safer bet to go with an independent financial adviser.

Types of financial adviser fees

There are a few different types of fee structures for financial advisers.

1. Percentage fee. This is the most common way for advisers to charge. You’ll be paying a fee based on a percentage of the money you invest with them. Usually that’s an initial percentage charge for becoming a client, then an ongoing percentage charge each year.
2. Fixed fee. These fees are charged each time you go to the adviser for different ‘projects’, such as consolidating your pensions. These are best for people who don’t want ongoing advice and just need help with a specific job.
3. Hourly rate. An hourly rate adviser is still a rarity, but becoming increasingly popular. They’re more prominent over in the US, and as the UK continues to play catch-up with the US, I imagine we’ll see more options for hourly charging.
4. Commission-based. From 1 January 2013, it became illegal for financial advisers to be paid commission when providing advice on investment portfolios. The world of “kickbacks”, “retrocessions”, and dirty share classes is over. It’s worth noting, though, that commission can still be the favoured remuneration for any protection products arranged, such as life assurance.

For those who delegate investment management to their adviser and are being charged a percentage fee, a charge of 1% a year is daylight robbery (yet still surprisingly common), 0.5% is reasonable, and anything under 0.5% is even better.

Remember: the adviser’s fee is on top of any other investment charges, which can easily add up quickly. Plenty of advisers outsource their investments to discretionary fund managers (DFMs), who charge another 0.5% for their services. These DFMs will almost certainly be investing in active funds, which adds another 1%-ish to your costs. All-in, you could be looking at costs of 2%-2.5% per year, which roughly halves the value of your potential portfolio after 40 years:

This is one of the many reasons it’s so important to consider a couple of things:

1. Do you really need someone else to manage your investments, given it’s possible to do it yourself by investing in a Vanguard LifeStrategy or Target Date Fund for under 0.3%? Alternatively, you could consider using a robo-adviser as an effective and cheap middle-ground between full DIY and full outsourcing.
2. If you do you want to delegate your investments to an adviser, it’s worth finding an adviser who embraces a low-cost passive investing philosophy, and whose all-in fees for portfolio management are as low as possible.

For non-investing services, fixed fees and hourly rates are the typical charging structure.

It’s difficult to put a number on what’s reasonable to pay, given the nature of projects can be wildly different. According to Unbiased, the average hourly rate for an adviser is £150 an hour, so that at least gives a starting point.

The world of commissions is much less murky than it used to be since advisers are no longer allowed to charge commission on investments. But it’s still worth asking whether the adviser receives commission for any non-investing services they offer.

Questions to ask your financial adviser

I’ve compiled a list of a few questions to ask your potential financial adviser, and the reasons they’re worth asking:

1) Are you registered with the FCA?

Before you hire an adviser, or ideally before you meet them, check them out on the Financial Services Register. This ensures you’re working with someone who’s properly regulated by the Financial Conduct Authority (FCA), and that you’re covered by the Financial Services Compensation Scheme (FSCS) should anything go wrong. The regulators also maintain a list of individuals who have been sanctioned by the FCA in the past – if they appear on this list then run the other way.

2) How long have you been a financial adviser?

You ideally want a sweet spot between “I’ve just passed my exams” and “I’m retiring next week”.

3) Are you independent or restricted?

As mentioned above, independent is significantly preferred.

4) Do you focus solely on investment management, or do you also advise on taxes, estates and retirement, budgeting and debt management, and insurance? If so, which area is your specialty?

Here the best answer depends on your needs as a client. A good adviser should be concerned about and able to speak to tax efficiency, tax strategy, trusts, insurance, and just answering general financial questions.

5) How do you get paid? Just by me or anyone else? If someone else, who and what for? And for the fees I’m paying you, is that what’s your fee structure?

As covered in the fees section above, make sure you’re clear on who’s paying the adviser, the nature of the fees, the fee structure, and how much they’ll be charging.

6) How much will this advice cost me, and can you show me a breakdown of every charge and cost – both now and on an ongoing basis?

A good adviser will be fully transparent will the fees they charge, as well as the fees charged by any third-party providers.

7) How many other clients in similar situations do you have?

If the adviser doesn’t have many other clients in similar situations, that’s a red flag. You want an adviser who’s had experience dealing with clients in your situation before, else you risk taking sub-par advice from an inexperienced adviser.

8) Can you tell me about your conflicts of interest?

This is an interesting open-ended question, which allows you to see how open they’re going to be with you – because all advisers have conflicts of interest. Some have more, some have less. On the highly conflicted end, restricted advisers can only recommend certain products. On the less conflicted end, all advisers face a conflict when faced with decisions like whether to recommend withdrawing cash from your portfolio to fund an expense versus keeping it invested and continuing to charge on the invested cash.

Advisers may also recommend you borrow rather than use available cash to buy a property (again, so they can continue to charge on the cash remaining invested). Many advisers also charge fees on money-market funds, when you could be receiving better rates in a savings account or a certificate of deposit.

9) Can you tell me about your qualifications, and the qualifications of your colleagues?

Financial advice qualifications are split into levels, in an inexplicably arcane and nonsensical way. The minimum qualification for some reason starts at level 4. At this level you have qualifications like the Diploma in Financial Planning (issued by the Chartered Insurance Institute) and the Diploma in Financial Advice (issued by the London Institute of Banking and Finance). These are the entry level exams which every financial adviser should have. We then skip level 5 entirely, and move straight to level 6. Here we have qualifications like the Advanced Diploma in Financial Advice (the higher qualification issued by the LIBF), as well as some specialist qualifications like the Certificate in Pensions Transfers and Level 6 Financial Planning in Retirement. The highest level is level 7, which is the Certified Financial Planner qualification issued by the Chartered Institute for Securities and Investment. When assessing an adviser’s qualifications, level 4 is the bare minimum, level 6 and level 7 are both good. Be on the look out for specialist qualifications if you have a particular issue you want addressing, like a pension transfer or mortgage advice.

That’s all on the financial planning side – once you start getting on to investment qualifications then that’s a whole other mouthful of alphabet soup. But with investments, in my experience the correlation between qualifications and competence is weak. I’ve met many excellent investors with no formal qualifications at all, and many CFA charterholders who flog terrible investment products to unwitting clients. When it comes to figuring out whether the investment gurus at the financial adviser’s firm know what they’re talking about, I wouldn’t put too much stock in the letters after their name. The next set of questions on this list are designed to figure out whether they’re any good or not.

10) Will I always see you, or will other people in your company look after me as well?

If you’re signing up with a financial adviser because you value the human relationship, then you’ll need to know up front who you’ll be dealing with. You don’t want to sign up with a seemingly great adviser, only to realise your net worth isn’t high enough for this particular adviser, and for them to fob you off onto a newly qualified colleague looking to build their book.

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This set of questions will work well regardless of whether or not you want the adviser to manage your investments.

The following questions can be used if you’re looking to hire an adviser to manage your portfolio:

1) Do you outsource investment management, or manage it within your firm?

There’s no correct answer here – but it’s useful information for you to know, and informs your follow-up questions.

2) What’s your investment process and philosophy?

Any adviser mentioning passive investing or factor/smart beta investing is a good sign. But this will be a rarity, as most advisers enjoy picking active fund managers the same way active fund managers enjoy picking stocks. This is the main reason I’m sceptical whether I’ll ever employ an adviser to manage my own money. When an adviser starts talking about beating the market, beating their peer group, fundamental analysis, or technical analysis, it’s a bad sign. Even if they show you a track record of market-beating returns.

3) [If they outsource their investment management] How do you select your investment managers?

Look for similar answers to the question above.

4) How do you help clients determine risk profiles, time horizon, and asset allocation?

The more in depth, the better. Look for more than just “We have you fill in a risk tolerance questionnaire.” A questionnaire is good, but should be used in conjunction with an in depth investigation into your financial life through a conversation with your adviser.

5) What risk management practices do you have in place to make sure my portfolio remains appropriate?

Look for systems, not promises. You want the adviser (and underlying investment manager, if outsourced) to have robust, automated systems in place which as far as possible remove the possibility that your portfolio deviates from their central process. What you don’t want to hear is “I review all my portfolios on an ongoing basis to ensure they’re appropriate”. What that really means is “I look at my portfolios when I remember to”. You want systems which physically prevent your portfolio from deviating too far from a central model, which all client portfolios are invested in line with.

6) Do all portfolios of the same risk profile look the same? If not, why not?

Related to the previous question, this one checks how much influence an individual financial adviser/investment manager will have over your portfolio. You want all portfolios of the same risk profile to look the same. If an individual adviser or investment manager has discretion to tweak the contents of your portfolio to make it look different to a central model, that’s bad. Models are good. They make sure your portfolio isn’t given to someone who might read an article about how great small-cap Japanese stocks are, and then shoves 20% of your portfolio into them.

7) How will you benchmark my portfolio’s performance?

You just need a sense check to make sure a) the benchmark is reasonable, and b) they’re not the kind of adviser who benchmarks a balanced mandate against cash to make themselves look good.

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Some of these questions will be uncomfortable to ask.

But that’s the price you pay to find a trustworthy steward of your capital. If they’re a true fiduciary, they’ll understand why you’re asking these questions, and will be more than happy to answer them.

During the course of your interviews, try and avoid giving too much weight to how much you like the adviser. I guarantee that every adviser you meet will be charming, eloquent, and (almost always) good-looking. These are the types of people who make a living from being charming, eloquent and good-looking, and are therefore exceptional at getting clients to like them.

Unfortunately, charisma isn’t the basis on which you should be deciding who to hand your life savings over to. Many investors have handed over their cash to charismatic advisers, who have gone on to make terrible decisions with their money.

As mentioned earlier, the combination of low barriers to entry, high earnings potential, and misaligned incentives means it’s a great industry for mediocre or downright unscrupulous actors to navigate.

One way to avoid falling victim to the “liking bias” is to write down the answers to each of the questions you ask during your interviews, score them afterwards, and compare the scores to the other advisers you interview. This more systematic approach helps remove some of the emotion of the selection process, reducing the likelihood of overweighting an adviser’s charm in your decision-making process.

To end this section, it’s worth remembering that any talk of financial products, or even the slightest pressure to sign an agreement at the end of your first meeting is a bad sign and suggests you should go elsewhere.

Also, don’t hire anyone you can’t fire without personal repercussions. Don’t hire your friends or family.

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There were many questions I considered including in my list above, but didn’t – mainly on the grounds of the adviser being able to give you a plausible-sounding answer and you having no way to verify or refute it. Asking a question you can’t verify the answer to isn’t going to help you separate the good from the bad.

For example, a fantastic-sounding question is “How do you invest your own money?”.

If you were able to verify this, it’d be an excellent way to figure out whether your adviser invests in the same portfolios he’s recommending to clients. Unfortunately, the adviser most likely to lie on this question is also the one most likely to be untrustworthy – and you have no way of knowing whether they’re lying or not.

Similarly, asking for references or testimonials from current clients sounds like a good question to ask, but isn’t going to get you very far – they’ll simply ask someone they’re sure will provide a favourable review. This is one of the reasons why sites like Unbiased and Vouchedfor are so necessary, as they provide aggregated independent reviews.

Where to find a financial adviser

There are a few free financial adviser match-making services which can help you search for an adviser based on where you are and what you’re looking for help with. They include:

1. The Evidence Based Investor’s ‘Find an Adviser’ service. I’ve been following Robin Powell, and his site ‘The Evidence Based Investor’ (TEBI) for many years now. He’s a staunch advocate for passive investing, and an outspoken critic of traditional high-fee active management. We like that kind of thing at Occam Investing.

He and the guest posters over at TEBI produce some fantastic content aimed at educating and empowering investors – it’s well worth a read and appears on my list of the best investing blogs. He partners with selected financial advisers, who have been pre-vetted to ensure they adhere to an evidence-based investment philosophy and are transparent on fees and conflict of interests.

2. Unbiased. This is a great comparison site – the GoCompare of financial advisers – which lets you search for advisers based on location, method of receiving advice (face-to-face vs remote), and your needs.
3. Vouchedfor. Similar to Unbiased, but also includes independent reviews from clients. Very useful.
4. The Personal Finance Society. A bit more basic than the ones above, and the information returned is much more limited. It does allow you to search by specialism, though, which is useful – and the specialisms are quite granular. So if you have specific needs like Sharia-compliant finance or expatriate finance, then it’s a good starting point.
5. Society of Later Life Advisers (SOLLA). A good resource if you’re looking for retirement/estate planning advice, but the lack of independent reviews means it’s tricky to figure out who’s good and who’s not. It’s worth cross-referencing any advisers you like the look of against Vouchedfor and Unbiased. Similar to this site is MoneyHelper’s Retirement Adviser Directory.

If you don’t think you’re in need of an adviser, but still want to get a grip on your financial life, there are a couple of excellent resources worth mentioning.

The Money Helper Service is fantastic for advice on the basics of financial planning. It’s got sections on pensions, budgeting, benefits, insurance, credit cards, long-term care, estate planning, mortgages, and plenty more. And it’s free!

The GOV.UK site is also surprisingly helpful for fact-checking. It’s always kept bang up to date, and the pages are written in understandable, jargon-free language, with plenty of useful tools and calculators.

What if things go wrong?

Hopefully it won’t get to this stage.

But if the worst should happen and you think your financial adviser has given you poor advice or mis-sold you something, then here’s what happens.

The first port of call is to lodge a complaint against the firm itself if you think you’ve lost money through the firm’s dishonesty or negligence. But you’re not going to get much back if the firm goes out of business (which tends to happen if lots of people start making complaints against them).

If this happens, the Financial Services Compensation Scheme may cover up to £85,000 of investments per person, per product. You can claim for free online: there’s no reason to use a claims management company. Just a reminder: you won’t be compensated for investments falling in value, unless this poor performance resulted from bad advice given by a regulated adviser.

If the firm hasn’t gone out of business, then assuming your financial adviser is regulated by the FCA, you have access to redress should anything go wrong with your advice through the Financial Ombudsman Service (FOS). They sort out complaints between clients and firms which haven’t gone bust, and can ask firms to put things right in a variety of ways, not just compensation.

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I’ve been quite tough on the financial advisory world in this article.

But that shouldn’t put you off – there are plenty of high-quality financial advisers out there. They do exist. And a great financial adviser is worth their weight in gold – not just in terms of the services they provide, but also the peace of mind they offer. 

So hopefully that makes the process of how to choose a financial adviser a little easier, and at least gives you enough information to start interviewing advisers and knowing what to look for.

I’m intending to update this article periodically, so let me know below if you have any questions on anything I’ve mentioned here, or have experiences (good or bad) with advisers which you think others might benefit from.