Financial management is difficult and you will almost certainly benefit from advice. But it is something of a regulatory minefield, as you will see. The word 'advice' on this page is used in its plain English sense. In regulator-world it has a more precise (and restricted) meaning and only Independent Financial Advisers (IFAs) (see below) are allowed to use it. The rest of us, including the regulator, can only offer ‘guidance’.

Titles

Choosing financial advice is a minefield. The enormous pie of 'Advice' can be sliced in two different ways, both of them important. There is:

1. 'Regulated advice' and 'unregulated advice', both legally defined terms

2. The descriptive names that advisers choose to call themselves.

The regulatory slice matters because then you have protection against carelessness and, worse, scamming. Against that, regulation is expensive and therefore so will be your fees.

'What advisers choose to call themselves' matters as a description of the focus of the firm, or at least the way it wants to present itself.

There are two types of regulated advice under the law: 'independent' and 'restricted'. Independent financial advisers (IFAs) must be prepared to help you buy the whole range of financial products without bias. 'Restricted' financial advisers typically represent a particular financial services firm and will favour the products of that firm, but within a code of behaviour set by the regulator (the FCA).

You would think that restricted advice implied a potential conflict of interest that deserved a clear declaration in the firm’s marketing literature but that appears not to be the case.

All firms, whether regulated or not, can call themselves whatever they want (subject to restriction on the phrase IFA). In practice there are four main descriptions:

1. Wealth managers

2. Financial planners

3. Financial coaches

4. Financial advisers

'Wealth managers' are usually (but not always) providers of full financial management services to the wealthier end of the market. 'Planners' are usually (but not always) members of one of the two professional financial planning associations. 'Coaches' usually (but not always) have an emphasis on helping you help yourself and project an image of freedom of commercial bias. 'Advisers' could be anything, but there's nothing wrong with that.

Don't sneer at buying an hour of the time of a professional who is none of these things - your local accountant for example. Be wary of the advice of enthusiastic friends. They will want you to do all sorts of things which they enjoy but which are not as necessary as they think. If it's not in Simple Investing you don't need it.

IFAs

The term IFA is legally defined. It applies to a person or firm who has submitted to a regulatory system governing the giving of advice to consumers. 'Advice ' is also defined in this context, meaning advice that includes recommendations to buy specific financial products. Think of it as a legal framework authorising sales pitches to consumers but designed to protect them.

Advice that does not fall within the legal definition is called 'guidance'. In all material from the regulator or in law you will find very careful usage of the words 'guidance' and 'advice'.

The great majority of IFAs are skilled, intelligent and honest. We all certainly need financial advice. And the amount of money involved is large, so it's certainly worth paying for it. So what's the problem?

The Problem

Until 2014 IFAs were allowed to earn commission from providers on products they persuaded their clients to buy. It was to the credit of the regulator that they finally outlawed this practice, except under certain conditions, following an extensive investigation called the Retail Distribution (RDR for short). It was perhaps less creditable that it took them 15 years to do it.

The system that replaced it is inevitably more complicated and opaque. Other conflicts might include:

• Your IFA may be receiving incentive from product providers to mention their products. 

• They may have other undeclared financial relationships. 

• Like all professionals, they like to make things more complicated than they are.

So, IFAs will be helpful, honest and wish you no harm. But they operate within an incentive system that inevitably drives them to sell you stuff that rewards them. For you, that means higher costs and lower returns.

If you want to buy product, by all means go to an IFA. But it will pay you sometimes to get other sources of advice, for which you should expect to pay just for the (expensive) time of the skilled and experienced person who will provide it. If you buy product you are paying anyway, but for the product provider's sales and marketing effort, not for advice.

Fees

Until you become a net saver, and therefore an investor, you should be able to obtain all the advice you need from free sources. After that you may need to pay for professional help. The trick here is to avoid lifetime ad valorem fees on your savings. Once you've saved your first £10,000, to spend maybe £1,000 (10%) on advice seems like a lot. But the advice you receive will be just as applicable as you build your first £100,000 and indeed your first million. In that context it’s not a lot. In other words it’s an investment in your future, not a cost.

An adviser should charge you a fee, not a percentage commission. More, they should charge fees for all their clients and not take commissions from anybody. Otherwise they are not unbiased.

Bias

Many advisers are 'tied' to specific wealth managers. This means they only recommend the funds of that manager (or funds from which that manager takes a commission). One major wealth manager (but not the largest) has 1,700 tied advisers. We have looked at a few websites of tied advisers but are unable to find any disclosure of that conflict of interest. Presumably the regulations either do not allow it or are framed in a way that makes them ineffective.

There is no single qualification or designation that guarantees you are getting real advice. The advice industry before the regulatory changes of 2014 was taking £6 billion per year off the consumer in return for acting as the sales channel of a financial products industry. Things are different now, but it's still a big industry and it only has one source of profit and that is you.

Skills

Advisers don't need to be clever - just honest. (Simple Investing only needs simple advice). Whatever you chose be ruthless in understanding your adviser's source of income.

The government-sponsored advice service MoneyHelper has a page that lists no less than five different adviser directories but offers no advice on how to chose between them. Regrettably we can't decipher their marketing schtick either.