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.

You probably won’t have heard of it, but the financial services business is undergoing a fundamental change at the moment.  If you use a financial adviser you need to be aware of this because this will affect whether they will be able to trade from the end of 2012.

Essentially, the Financial Services Authority is making some sweeping (and overdue) changes to the way financial advisers are regulated and controlled.  This will raise standards for consumers in a number of areas. This is called the Retail Distribution Review, if you’re interested to check it out.

Qualifications
At the moment, the basic qualifications to be a financial adviser are laughably low.  The current minimum required is set at QCA level 3, which is roughly equivalent to GCSE level.  I am sure that if you use an adviser you were not aware of that!  The new requirement will raise the minimum standard to QCA level 4, which is diploma level.  This will be a major change for most of the financial services industry, and means that most financial advisers will need to gain new qualifications.  We fully support this change because we believe that financial advisers should be highly qualified to give advice.  Many financial advisers have not undertaken any serious training or qualifications for years, citing “experience” as their justification.  However, we think that they should undergo a rigorous regime of regular training, just like any other professional.  After all, would you trust a doctor who told you that the last qualification he took was 25 years ago?

You should ask your adviser if he plans to study the new curriculum, and if not what will be his plans will be for you.  If he is not suitably qualified from 2013, he will be unable to trade.

Dan Woodruff is a Certified Financial Planner, which is an advanced level qualification much higher than is required by the current or proposed rules (QCA Level 6, equivalent to degree level).  Dan Woodruff also holds a degree in Law (LLB), as well as other advanced financial services and legal qualifications.

Remuneration
A key change to the way financial advisers work is that they will be forced to stop using commission to be paid, and instead agree a fee for their work with their clients.  For most advisers, this will be a drastic change to their business model.  We fully support this change because we think it will go a long way to remove bias from financial services advice.  At the moment, most financial advisers get paid if they can sell you a product.  There is no incentive to provide you with the most appropriate advice, or to follow this up with regular reviews.  This is a bit like asking a mechanic to check over your car but asking him to agree to only be paid if he can find something wrong with your car;.  In this scenario, do you think he would find a problem?

We already meet the new requirements.  We work on a fee basis with our clients, agreeing fixed fees for transactional work like our Financial Advice service, or regular payments for ongoing services and advice, like our Portfolio Management service.

Scope of advice
Financial advisers will also be forced to choose whether they offer independent advice, or restricted advice.  We think that many financial advisers will choose to offer restricted advice.  You should check with your adviser to ensure that he continues to offer independent financial advice from the end of 2012.

We will continue as now, to work on behalf of our clients, offering truly unbias, independent advice.

Professional standards
The rule changes will force advisers to adopt ethical and behavioural standards through the creation of a Professional Standards Board.  We already adopt this approach through our membership of the Institute of Financial Planning, which is the leading professional and ethical body for financial planning practitioners. The IFP certifies, upholds and monitors the professional standards of Financial Planning Practitioners to protect the interests of members of the public, thus ensuring that they receive proper Financial Planning advice from its members.

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!

The Revenue has a deadline on declaring offshore accounts – 12th March 2010.  It is fine to have an account offshore, but if you are UK domiciled you are liable to pay UK tax on your worldwide income.  If you don’t declare your income and are caught you will be liable to pay the tax due, plus a fine.

Welcome to our financial planning blog. This is the first post of many.  Check out www.woodruff-fp.co.uk.