Financial Advisers Are Not All Equal!

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There are several different types of financial advisers in the UK and, if you are currently looking for financial advice, it is important to you that you understand the main differences between them. Just as not all medical professionals are the same – there are paramedics, auxiliary nurses, nurses, GPs, registrars and consultants, for example – neither are all financial advisers the same!

Types of Financial Advisers

There are three main categories:

Tied advisers, who usually work for a bank or an insurance company. They are only authorised to advise you on their own company’s products;
Multi-tied advisers, who are able to offer advice from a limited set panel of companies;
Independent financial advisers (IFAs) who will offer you unbiased advice from the whole of the market.

The Importance of Independent Financial Advice

IFAs differ from tied and multi-tied advisers, not only because they offer whole of market advice, but also because they do not represent a company – they act as the representative of their client, and it is their primary responsibility to act in the best interest of their client at all times. IFAs must also offer clients the option to pay by fee, rather than commission from the product provider.

Once an IFA has carried out a detailed fact find with you, so that he (or she) can fully understand your current financial situation, as well as your financial needs and objectives, he will go away and do some research to find the most suitable financial products for you. He will then present his recommendations to you at a follow-up meeting.

Qualifications

Minimum qualifications: All advisers giving investment advice must have the minimum qualifications of the Certificate in Financial Planning (CertPFS) or its predecessor the Financial Planning Certificate (FPC) from the Chartered Institute of Insurance (CII), or the Certificate for Financial Advisers (CeFA) from the IFS School of Finance.

Higher qualifications: By the end of 2012 advisers who wish to continue to give investment advice must have achieved higher qualifications – either the Diploma in Financial Planning (DipPFS) from the CII, or the Diploma for Financial Advisers (DipFA) from the IFS. Roughly one third of all financial advisers in the UK are currently qualified to this level already. The others are studying hard!

Certified Financial Planner: This is an internationally recognised qualification for financial advisers all over the world. In the UK it is awarded by the Institute of Financial Planning (IFP). To become a Certified Financial Planner (CFP) a financial adviser must first hold the DipPFS, or equivalent qualification, must have at least three years’ relevant financial services experience and must have worked on a case study to produce a detailed financial plan of a sufficiently high standard to be passed by the IFP examining board. They must be members of the IFP, abide by a strict code of ethics, and commit to continuing professional development (CPD).

Chartered Financial Planner: To become a Chartered Financial Planner – the pinnacle of the financial planning profession – an adviser must be a member of the Personal Finance Society (PFS), have a minimum of five years’ relevant experience and commit to continuing professional development. He or she also has to gain the CII Advanced Diploma in Financial Planning, which is the highest qualification currently awarded by the CII to financial advisers. The CII operates a points system for its Financial Services exams. For example you must achieve 70 points to be awarded the Certificate in Financial Planning and a further 70 points to be awarded the Diploma in Financial Planning, making a total of 140 points. However, to be awarded the Advanced Diploma in Financial Planning the candidate has to gain 290 points – more than four times the minimum requirement for financial advisers!

CFPs and Chartered Financial Planners are the elite of the financial planning profession. They have demonstrated, not only advanced technical knowledge and financial planning expertise, but also an exceptionally high level of commitment to their clients by the time and money they have spent in attaining their qualifications to enable them to give the highest level of advice.

Do financial advisers’ qualifications matter? Certainly there are many excellent advisers who do not have higher qualifications (yet). However, if you had a serious illness, you would expect your doctor to refer you to a highly qualified and experienced consultant would you not? CFPs and Chartered Financial Planners are like the consultants of the financial planning profession and the good news is that, unlike in the medical profession, you can consult them directly.

Tips on Choosing a Financial Planner

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A financial planner can be an invaluable advisor to you as you work towards your financial goals and dreams. A good financial advisor can act as the quarterback for your team of advisors, working with your tax advisor, insurance agent, etc. to make sure the different parts of your financial plan are working together.

Most people could use some help keeping their financial house in order. When should you hire a financial advisor? Some people hire financial planners only when they need advice about a specific issue such as saving for college, paying down debt, or evaluating an early retirement offer. Others hire a financial planner to complete a comprehensive plan and monitor that plan on an annual basis. No matter what your reason is for hiring a financial planner, one of the greatest advantages of working with a financial expert is the added motivation you’ll have to achieve your financial goals.

One concern with hiring a financial professional is that anyone can call themselves a financial advisor. Unlike lawyers and CPAs – where you have to take an exam and have specific training before you can hold yourself out as a CPA or an attorney – there are no such requirements before you can call yourself a financial planner.

However, there are some designations in the financial planning field that help distinguish experienced, trained financial professionals from others who may not have any qualifications. Some of the designations to look for include:

Certified Financial Planner (CFP) – to be a CFP, you must meet an education requirement which shows that you are knowledgeable in all areas of financial planning, you must pass an exam, and you must have three years of relevant experience before you can hold yourself out as a CFP. CFPs must also abide by a Code of Ethics which are enforced by the CFP Board.

Chartered Financial Analyst (CFA) – A CFA is a title given to someone who has passed an exam about investments and finance administered by the Financial Analysts Federation.

PFS – CPAs who have several years of experience providing financial planning for individuals can attain the PFS designation. CPAs who also have the PFS designation have extensive tax and financial planning experience, so they are a good choice for people with complex tax situations.

You should contact and interview several financial advisors before hiring one. Some questions you should ask include how are you compensated, do you have an area of specialty, do you have clients similar to me, how long have you been providing financial advice, etc.

Working with a Fee Only Financial Planner

You don’t have to be rich to work with a financial planner. Many people hire financial planners to help them achieve their financial goals and dreams, whether they have a million dollars or just a few thousand dollars saved. You’d be surprised at the number of people who have turned to financial advisors for help with retirement planning, investment advice, budgeting and debt management, tax planning and/or comprehensive financial planning.

There are many reasons why you might want to talk with a financial planner including:

– to learn how much you really need to save for retirement
– to determine the best investments to meet your goals
– to make sure you are getting all of the tax benefits you are entitled to
– to understand how much and what type of life insurance you need
– and many more…

You don’t need to wait until you have enough money or are ready to retire to work with a financial advisor. Young people just starting out can benefit from financial planning just as much as married couples preparing to retire in a few years can. Whether times are booming or we’re in a recession, whether you just need help creating a budget, saving for your children’s college education, or you have complex retirement planning needs, anyone can benefit from financial planning.

What Should You Expect When Working with a Financial Planner?

In general, a financial advisor will start by reviewing your current situation and helping you identify your financial goals. Once your goals and objectives are determined, a financial planner will prepare a plan that will help you achieve your financial goals through saving, investing, budgeting, etc. The plan should cover all aspects of your financial situation including cash flow and debt management, investments, retirement, taxes, insurance and estate planning. Other areas that may also need to be considered include saving for college, or business planning.

Once you have a financial plan in place, you should review it periodically to make sure you’re still on track to meet your goals. Your financial situation is always changing, so your financial plan should change as well.

What to look for When Choosing a Financial Advisor

There are many types of financial planners including fee-only financial planners, fee-based advisors or the traditional brokerage firm. Each provides different services, and more importantly, each is compensated differently. Brokerage firms typically sell you a product for a commission and their main service is investment advice. Fee-based advisors will generally provide more comprehensive financial planning, but their main service is managing your investments for you, and they earn a percentage of the assets managed for their compensation. Fee-only financial planners focus more on comprehensive financial planning, including retirement planning, investment advice, budgeting, tax strategies and estate planning. Fee-only financial planners typically charge an hourly rate or a project fee and don’t earn commissions on any products recommended.

In addition to services offered and compensation, you should also look at the advisor’s experience, qualifications, and their area of expertise before hiring them. While CFPs and NAPFA-registered advisors must have met certain education and experience requirements in order to use the credentials, other financial advisors may not have any experience or qualifications.

Why Work with a Fee Only Financial Planner?

When you work with an advisor who is dependent on the commissions they earn from products they sell, there may be a conflict of interest. With fee only financial planners, there is no conflict of interest because the financial planner is paid directly by you for the services they provide, not the products they recommend. A fee only financial planner does not benefit economically from the products they recommend to you, so you can be sure that they have your best interests in mind when they make a recommendation.