Who has consulted an Independent Financial Adviser (IFA)?

Right, so the idea there is they supposedly have an incentive to find well-performing funds to increase the amount they’ll earn, which is also in your interest. Win-win, right?

That’s what will happen with someone trust-worthy, honest and actually capable. Hopefully your chap is one such person.

But equally you could have someone that just sits back and does nothing of value, and just rakes in the money. For example:

  • Client invests £1mil
  • Good IFA John picks good investments that increase the value by 4% after a year, to £1,040,000. He then charges his 1% fee, making £10,400.
  • Or bad IFA Sam picks an investment he didn’t bother researching. It only increases value by 1% after a year, to £1,010,000. He then charges his 1% fee, making £10,100. (Notice client now has less than he started with, but Sam just doesn’t need to care.)

John’s reward for his excellent performance and hundreds of hours of hard work is an extra £300 compared to Sam, who basically did nothing and laughed his was to the bank.

Basically, for an IFA on a % fee, they don’t actually have much incentive to do well. If they really want to make extra money, it’s far more lucrative to become unscrupulous and take an additional % cut/fee/kickback for investing in certain products. That way they can get 1% from the client, and 1% from the fund, and make an extra £10,000 instead of a meagre £300.

Yes, can see that and hopefully I do have a good chap. Can you do the same scenario with a fixed fee IFA? R-

Sure, with a fixed fee it looks like:

  • Good IFA Carl picks good investments that increase the value by 4% after a year, to £1,040,000. He then charges his £3,000 flat fee.

Here’s what the client ends up with after 1 year:

  • Good IFA John who charges 1%: £1,029,600
  • Bad IFA Sam who charges 1%: £999,900
  • Good IFA Carl who charges a fixed rate: £1,037,000

Obviously, clients are better off with Carl. It’s a lot easier to trust Carl because we know he isn’t driven by greed. He’s just charging enough to make his living, in line with the value of his advice. (You can be especially sure of this if you pick funds based on his advice and buy them yourself - then you know with certainty there’s no kickback situation.)

Carl’s incentive to do well is that if he gives you bad advice that doesn’t meet your financial goals, you simply won’t go back to him for advice next year. You’re free to leave him, because as a good IFA he hasn’t done anything to “trap” you in to his service.

You can bet that Sam, on the other hand, will do everything in his power to make it as difficult as possible to leave him, and to convince you there’s nothing wrong and you’re doing well. He just wants his 1%. Sam’s main skill will be making clients happy that their investments gained 1% this year, while hiding the fact the client is actually poorer. Sam’s clients consider “feelings”, and don’t really look at the reality of the numbers.

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I consulted one as I’m self employed and manage my own pension.

I simply wanted a pension review, and advice on which funds to invest in. I got this and the selected funds have outperformed my previous funds, so the advice had more than paid for itself.

However the actual process was much as I’d feared - much more interested in selling me into a scheme that would get them commission, couldn’t answer specific questions about products they weren’t pushing (p2p lending for example).

Also used two for mortgages (one was not good, the other excellent and also used her for life insurance).

So I guess my experiences bear out other people’s concerns - how do you find a good one? If you do they’re probably expensive, upfront costs are rarely clear etc etc…

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I don’t feel I need general ongoing investment advice. I’m perfectly happy to do that myself. Where I feel an IFA could potentially help me is for ad-hoc large financial events - mortgage, inheritance, whether to transfer pensions when moving jobs, etc.

I don’t know if I can get an IFA for ad-hoc needs or if I need to employ one on an ongoing basis via some kind of retainer fee in order to access ad-hoc advice. This has been an obstacle for me.

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When you’re unsure of where to go, do you often resort to the internet or chat to friends? I used to call my parents but I now realise that their financial journey was so different to mine that it actually isn’t the best resource for me.