Woodruff Financial Planning blog

The new Government has announced that the Financial Services Authority (FSA) is to be replaced by a new regulator, the Consumer Protection Agency (CPA?).

You may not immediately think this is of relevance to you, but this signals a major shake-up of the financial services industry.

Of course, it is of interest to us, since our activities are regulated by the FSA currently, and therefore responsibility for this will pass to the new agency.

It seems that the new regulator will come under the control of the Bank of England, which will have more say over the wider economy than at present. Whether the BoE wanted this, or indeed whether this is a good thing is beyond our ability to comment.  The new Consumer Protection Agency will have responsibility for the regulation of the conduct of the banks, insurance companies, and financial advisers, like us.  This could have the confusing aspect that larger organisations may be regulated by 2 bodies – the Bank of England, and the CPA.  Obviously, the details of the proposal will iron themselves out.

What does this mean for our services?
Well, it may be too early to say, but it is unlikely that a whole new set of staff will be conjured up for the new agency.  Therefore, I would expect that the CPA will initially be staffed by most of the existing staff doing the same role at the FSA – a case of a the same old regulator under a different name; initial evidence of this could be seen in the appointment of an existing high ranking officer of the FSA to the Bank or England to facilitate the transition but then I suppose this was always likely to happen.  I suppose the biggest change may be in the overall policy of the new agency; until now, the FSA has focused on principles based regulation, with a whole raft of initiatives. If this changes, you may see a different style of financial advice in the future.

Our concern as a small business in the financial services sector would be that the change may not be substantial enough.  If the FSA is reformed to become the CPA in name only, what does this achieve for the consumer other than the reprinting of thousands of brochures and websites all over the country as our existing stocks become obsolete?  Of course, if you are a compliance consultant you will probably be rubbing your hands with glee at the prospect of a whole new set of rules to follow, but as business owners we will be diverted from the primary goals of our business to serve our clients’ interests (and of course to make some money). We are yet to be convinced that this is a worthwhile change either for us as a business, or more importantly for our clients.  Of course, we were not consulted on the change!

Maybe that is yet to come…?

We often come across financial services firms which call their advisers “Financial Planners”.  They might call themselves Financial Planners, but what most of them offer is financial product sales.  The purpose of this post is to give you an idea of what we do as Financial Planners, compared to other Independent Financial Advisers, who might work for a firm or a bank.

We do this because we feel that the role of a Financial Planner is actually distinct from that of the rest of the financial services profession.  By consequence, we believe that it is very difficult for you to determine the differences between the various services on offer – we would prefer for the role of a Financial Planner to be enshrined and protected, just like that of a Chartered Accountant or Solicitor.

Much of this information is cribbed from the Institute of Financial Planning website, which is aimed at promoting the Certified Financial Planner qualification and standards (to which we subscribe).

What is Financial Planning?
Financial Planning is the process of developing strategies to help you manage your financial affairs so you can build wealth, enjoy life and achieve financial security. Financial Planning is an effective way of ensuring you are fulfilling your life ambitions without having to worry about your finances.  Financial planning is about building towards financial independence, and is not focused on goals, income, assets, expenditure etc.  This process is not about product sales (although obviously, products would be used towards the end of the process to achieve the goals set).  Financial Planners tend to be fee-based because they charge for the creation and maintenance of a plan rather than selling a product.  This means you get what you pay for – advice rather than sales.

What is Financial Advice
Financial advice is what is supplied by the overwhelming majority of UK financial advisers.  This tends to be bespoke, targeted, transactional advice leading to a financial product sale.  As most financial advisers are commission based, they rely on selling you a product to get paid for their work.

1. What is their experience?
   Obviously, this is important; but as important is to ask their experience in dealing with situations similar to those faced by you.
2. What are their qualifications?
   This is more important than many financial advisers will lead you to believe.  Having advanced and specific qualifications shows a technical expertise, and a commitment to keeping up to date with the current trends.  After all, would you go to a doctor who only had a basic level of qualifications, and hadn’t kept up to date in 20 years?
3. What services do they offer?
   They should be able to easily define the services they offer to clients so you can decide if these are right for you.  You need to decide whether a comprehensive ongoing review is right for you, or you just want transactional advice on a one-off basis.
4. What is their advice process?
   How they go about delivering their service is also important – after all, you want to ensure that you will get a robust and consistent delivery of your service.  Our advice is to avoid advisers who cannot easily articulate their process.
5. How are they paid?
   This is important to your pocket, but also to know if you need to watch out for signs of bias.  You also need to know up-front the extent of your liabilities.  Our preference is for a fixed fee agreement, but many people prefer to operate on commission.
6. What is the typical cost of their services?
   This will help you to decide if the service is affordable and fits in with your expectations.  Ultimately, you want to avoid an open-ended commitment on your side.
7. Who else benefits from their recommendations?
   This is a question often missed.  You may have been referred to the adviser following a recommendation.  Does the introducer receive any payment from this arrangement?  We are aware of some local independent financial advisers who regularly pay out up to 50% of their income to professional introducers such as accountants.  While this is fine if the client agrees, we would be concerned that the client is not aware of the arrangement.  If you think about it, if the introducer receives payment (of such a large amount), your adviser will be forced to increase the fees or commission charged to you to achieve their profit margins.
8. Have they ever been disciplined by the Regulator?
   You would probably want to avoid advisers who have been sanctioned by their professional body, but you can actually check this out yourself by searching for the firm or adviser on the FSA Register.  All financial advisers must be on this register to be able to off you financial advice.  If they are not registered, then you are not covered (and the ‘adviser’ should be reported).

According to a recent ICM poll, conducted for Aviva (see here), less than half of consumers would be willing to pay any sort of fees for financial advice.  We think that this kind of survey is misleading since in our experience people will pay for advice if they can be shown value for what they are receiving.

This goes to the heart of the commission versus fees debate.  Most UK financial advisers get paid by commission, although some may tell you that their advice is ‘free’. If they do, don’t believe them because getting paid by commission does not mean free.  Commission is paid for through the charges of the product.

We charge you for our time, advice, research and expertise just like any other professional service. We believe that commission creates an inherent conflict of interest between your and our interests, as this payment method is intended to encourage use of certain product providers over others. After all, if your garage was paid only if they sold you a new part on your car, rather than for the service, do you think they would sell you a new part each time? Of course they would because that is how they would get paid; and they would certainly be more likely to recommend the most profitable part for them rather than you.

We work on a fixed fee basis, so that you can be sure of the cost to you, regardless of how long the work takes.

Click here to see how we charge for our advice.

If so, you can search the Financial Services Authority’s Register of IFAs.  This is maintained by the Regulator, so if your adviser is not listed here, he is not regulated (and you should steer clear).  You can search by firm or by individual name.  You may even uncover some interesting facts about your adviser’s history and even whether he has had a dark past…

See http://www.fsa.gov.uk/register/home.do

For the record, our firm is registered under number 490462, and no we don’t have a dark past!