Independent Financial Advisers or IFAs are professionals who offer independent advice on financial matters to their clients and recommend suitable financial products from the whole of the market. The term was developed to reflect a UK regulatory position and has a specific UK meaning, although it has been adopted in other parts of the world, such as Hong Kong.
The term "Independent Financial Adviser" was coined to describe the advisers working independently for their clients rather than representing an insurance company, bank or bancassurer. At the time (1988) the UK government was introducing the polarisation regime which forced advisers to either be tied to a single insurer or product provider or to be an independent practitioner. The term is commonly used in the United Kingdom where IFAs are regulated by the Financial Services Authority (FSA) and must meet strict qualification and competence requirements.
In the UK the industry has been de-polarised since 2005. There are now three main classes of adviser: tied advisers (working for one financial institution), multi-tied advisers (offering products from a selection of the market and usually paid on a commission basis) and independent financial advisers. Independent financial advisers must offer their clients the option to pay for advice by fee as an alternative to commission.[1]
Typically an Independent Financial Adviser will conduct a detailed survey of their client’s financial position, preferences and objectives; this is sometimes known as a ‘factfind’. They will then advise appropriate action to meet the client's objectives; and if necessary recommend a suitable financial product to match the client’s needs.
Individuals and businesses consult IFAs on many matters including investment, retirement planning, insurance, protection and mortgages (or other loans). IFAs also advise on some tax and legal matters.
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Some financial advice is about investments and pensions: and some of these are 'financial products' packaged and marketed by financial institutions: and most of them pay commission. In the UK it is common for IFAs to limit the advice they give to commission-paying financial products. Traditionally IFAs have relied upon commission to pay for their services. In recent years there has been a shift towards fee based advice as this is perceived as fairer toward the client. However, due to under-capitalisation in the advice sector and consumer reluctance to pay for advice on which financial product to buy, the transition to fee based advice by IFAs has been slow and concentrated in the 'high net worth sector'.
The FSA has introduced a new disclosure regime for advisers giving regulated investment advice on retail financial products. Since July 2005 this regime insists that advisers who market themselves as independent must offer the option of paying a fee for advice on which 'appropriate' financial product to buy. The four main remuneration options available for financial advisors are as follows:
There are requirements for the type and amount of payments to IFAs to be clearly disclosed, so it would normally be easy to determine the cheapest option for a particular commission-paying financial product such as an investment.
Marketing costs such as commission increase the annual charges on financial products by a significant amount (ref: Sandler Review).
To offer financial advice an individual must represent or be an appointed representative of a firm registered with the Financial Services Authority (FSA). The FSA require that firms ensure that individuals acting for them have appropriate qualifications. The list of appropriate qualifications is determined by the Financial Services Skills Council at the behest of the FSA.
The qualifications for most firms relate to Chartered Insurance Institute (CII) exams past and present.
The entry level is normally the historic 'Financial Planning Certificate' (FPC), or its successor, the 'Certificate in Financial Planning' (CFP) which includes an additional examination focusing on investment advice and risk. For the payment of a fee to the Personal Finance Society members with this level of qualification may use the CertPFS designation. The exams to achieve this are certificate level as designated by the Qualifications and Curriculum Authority (QCA) each exam is approximately equivalent to a GCSE (five for CFP and three for FPC).
The next level is the historical 'Advanced Financial Planning Certificate' (AFPC) and newer 'Diploma in Financial Planning' (DFP). Again for a fee members of the Personal Finance Society may use the designation DipPFS.
The next level is 'Advanced Diploma in Financial Planning'.
The highest level is 'Certified Financial Planner' (CFP) issued by the Institute of Financial Planning or Chartered Financial Planner status granted by the CII.
All IFAs also have an obligation to keep up with current developments in the profession, sometimes referred to as Continuous Professional Development. There are many advanced and more specialised qualifications an IFA may take throughout their career, and it can be worth asking about an adviser’s specific areas of expertise.
While the CertPFS qualifications are the minimum requirements, it is likely that an adviser will progress to the more advanced qualifications throughout their career. With the introduction of higher qualifications becoming more important, the level of qualification can therefore be a useful indicator of an adviser's expertise, although a great deal of experienced advisers currently offer a greater deal of practical knowledge than those obtaining qualifications rapidly in a corporate training ground.
In addition to that, recently a project was managed by the Financial Services Skills Council (FSSC) - to assess the various types of IFA Qualifications.
All qualifications / designations have been assigned a level based on an analysis which was completed by UK NARIC, a national DfES agency which provides guidance on levels of international qualifications (academic, vocational and professional). A list of these qualifications was compiled at IFA Promotion and split up into two levels (A & B).
IFA Network is an association of IFAs. All financial advisers in the UK must either be authorised or exempt under the Financial Services and Markets Act 2000. Membership of an IFA Network qualifies an IFA as being exempt from regulation. The IFA Network is then responsible for the advice and regulatory compliance of its members.
Financial services are heavily regulated in the United Kingdom. While this may in some cases restrict the market and places a heavy burden on financial services professionals, it also makes for one of the safest consumer markets in the world.
If a client buys a financial product on the advice of an IFA which turns out to be unsuitable, they have the right to complain and, if the complaint is upheld, may receive compensation. All regulated financial services companies, including IFAs must have effective internal complaint handling procedures. If a complaint is not dealt with satisfactorily internally, the client has the option of going to the Financial Ombudsman Service, which will conduct an independent investigation and has the power to award compensation if warranted. In a large majority of cases referred to the Ombudsman, it finds that the firm had treated the customer’s complaint fairly.
This does not mean that a client can claim compensation simply because an investment loses money. With all investments, there is an element of risk, the basis for complaint would only be whether or not that level of risk was unsuitable for a particular client based on the information given to the adviser. This is particularly important (and not well-understood in the public consciousness), and especially in relation to the sale of with profits endowments intended to be used to repay an interest only mortgage. A great many people saw strongly reduced investment returns from their endowments due to lower interest rates (and hence investment returns) and subsequently claimed that they had been mis-sold. While the poor performance is regrettable, it in no way constitutes mis-selling in the legal sense unless it can be shown that the endowment was unsuitable for the client's needs at the time it was advised. It is not possible to use retrospective judgements to assess decisions made in good faith in the past either.
In some circumstances an IFA will arrange a financial product to a client without providing them advice. This is known as an execution-only service, and is often accompanied by a partial rebate of commission paid by the product provider. This form of sale can be useful when the client does not require advice, as they can often get better value by going through an IFA than if they went directly to the product provider. It can have problems however, since no advice is given, the client has no redress if they subsequently find the product to be unsuitable for them. This has formed the basis of several ‘mis-selling’ claims for certain classes of product.
On 1 December 2004 the Financial Services Authority (FSA), the UK financial regulator, changed the rules governing financial advisers. Previously (under a system known as ‘Polarisation’) there were only two types of financial adviser, those who would advise and sell only one company’s products - known as a Tied Agent, and those who would advise and sell the most suitable products from the whole of the market – Independent Financial Advisers (IFA).
With Depolarisation, the FSA has changed this dramatically. A firm may now offer advice on products from just one provider (single tied), more than one provider (multi-tied) or from the entire marketplace (whole-of-market). Generally speaking, to be able to call itself "independent", a firm must offer its clients the option of paying for the advice by a fee and must be a whole of market adviser.
There are a few complications however :
The regulations that introduced regulation for mortgages and general insurance (GI) were developed and introduced around the same time as the depolarisation rules (Mortgages 31 Oct 04, GI 14 Jan 05).
Which?, the UK consumer campaigning charity, suggest several sources for individuals seeking an Independent Financial Adviser.[2] The FSA Register allows users to confirm an IFA is properly authorised. Unbiased.co.uk, the Institute for Financial Planning and the Personal Finance Society all allow users to search for local IFAs among their member base. Which? Local and VouchedFor.co.uk both allow users to search for local IFAs and read reviews from past users.