In Monday's article I looked at the first steps a client would take in engaging a financial planner; here I look in detail and what the role involves
When you search for financial planners on the Chartered Institute for Securities & Investment's (CISI) online "Wayfinder" service (rather like the Unbiased portal for IFAs), you get this explanation in the introduction:
"A financial planner focuses on you – your goals, your aspirations, your concerns. They look at the bigger picture and deliver a holistic strategy with a financial plan."
Now, if you ever saw a financial "advisor" in the 1980s, 1990s or even early 2000s this description of a "holistic strategy" may seem odd; your experience may have been more product-centric (and delivered by a salesman in a suit!). From Equitable Life to mortgage endowments, the reputation of UK financial advice was tarnished by aggressive selling tactics and unsuitable products. Some people still associate IFAs with that era.
Today that industry is actually quite different. A Retail Distribution Review has changed the way people pay for advice from commission to more transparent fees. But while the number of bad actors has fallen sharply, the FCA's weekly "wall of shame" reminds us bad advisers are still out there.
The most recent example involves advice given by Geoffrey Armin to 183 British Steel pensioners. Therese Chambers, joint executive director of enforcement and market oversight at the FCA, described this case as "callous incompetence" on Armin's part.
"People rely on the advice they're given for financial security into old age. Mr Armin’s advice not only put at risk the pensions people had worked for, it also eroded the trust between advisers and clients." (My italics).
Regulation, Advice and Semantics
It's wouldn't be all that surprising, then, if the vast majority of honest professionals were becoming wary of using the word "advice" too often. The acronym "IFA" still has a cachet and means something from a client's point of view too; it means they are not being encouraged to buy a product that the adviser isn't incentivised to promote a specific approach. Instead, the adviser can look at "whole of market", where choice is greater and fees are lower.
Financial planning, unlike targeted financial advice, may not involve any products at all. And that's helpful from a regulatory point of view; if you "intermediate" a product between a provider and a member of the public, you need to be regulated. This adds costs and administration time. So you can understand why "financial planning" has become so popular as a career path.
Many regulated financial advisers also offer financial planning and in an IFA firm there's generally a mixture of roles under one roof. The crucial difference is the firm is regulated.
Setting up as a solo financial planner can be cheaper and less hassle than becoming an adviser. Those with the appropriate qualifications such as the CFP will do this for legitimate reasons. Others perhaps less so. It's important for those seeking out expert advice to check a company's pedigree, whether it's regulated and what kind of qualifications are held by financial planners.
From a client's point of view, you would lose the protection offered by FCA regulation; from the provider's point of view, you may stray from "guidance" to "advice" and fall foul of the regulator. Clients generally ask specific action-oriented questions – what should I do about x? – and a financial planner may end up unwittingly giving advice.
The "advice gap" is real though; many IFAs and "wealth managers" (a phrase I'll revisit) won't touch you if your net worth doesn’t reach a certain level, leaving millions stranded with no financial plans.
Whether an army of financial planners are the right people to fill that gap is something for the regulator to grapple with. Next up I’ll discuss the barriers, both psychological and practical, why people don’t seek expert advice.
