Financial Advice: Why it always pays to avoid the wolf in sheep’s clothing

“Matthew McConaughey’s broker in The Wolf of Wall Street, right, tells Leonardo DiCaprio that all he cares about is taking money from his clients”

The financial advice sector is a bit of a smorgasbord. There are financial advisers, there are financial planners and there are brokers, all of whom provide financial guidance in one form or other.

It gets even muddier when you consider the different statuses they hold. For example, you can have tied agents, who are advisers who only sell financial products from providers with which they have an agreement. Then there are multi-agency intermediaries who can sell products from various providers. There are also independent advisers who do not receive any payments from product providers and instead charge a fee.

One of the most important roles of any adviser is to explain financial products and their charges in terms that make sense. This is a bit of a rarity in the financial world, where explanations of products and their costs can be opaque at best. Consumers are all too conscious of this. Almost nine in ten say it is their most important consideration when getting advice.

Yet while many of us could benefit from a bit of a steer when it comes to our savings or investments, most people prefer not to ask for help. In a recent survey Brokers Ireland found that just 38 per cent had taken the step of contacting an adviser.

CHOOSING AN ADVISER
Although so much is now done online, you will still probably want to get your advice close to home where possible. To find a financial planner near you, check the Financial Planning Standards Board (www.fpsb.ie). You’ll find a list of brokers by county on www.brokersireland.ie, while a quick search for “financial adviser near me” will yield plenty of qualified advisers in your area.

Planners tend to focus slightly more on your long-term goals than advisers, while brokers often specialise in one product area or another. There is a lot of crossover between the disciplines, so you might not want to rule any in or out until you check exactly what service they offer.

After you have come up with a few prospective advisers, the next step according to the Competition and Consumer Protection Commission is to check they are registered with the Central Bank (see registers.centralbank.ie). If not, steer clear, as you won’t have access to the usual complaints or compensation procedures should things go awry. For example, you won’t have recourse to the Financial Services and Pensions Ombudsman.

After that, find out what type of adviser they are; in other words, whether they are independent, a tied agent or a multi-agency intermediary. The vast majority do not meet the requirements to be able to call themselves “independent”, although this does not necessarily mean they won’t give the best advice. Make sure you know how restricted they are when it comes to the range of products on which they can advise.

Next ask about their qualifications and experience in advising people in a similar situation to yours. And never be reluctant to ask about charges. Advisers should give you a document on this the first time you meet, but make sure it is clear. If you are just paying a one-off fee for an advice session, that’s straightforward, but if you are engaging them for ongoing advice, or investing in or buying certain products, it gets more complicated.

You may also want to consider who you click with or feel will be easiest to work with. Many offer an initial chat for free. This is a good opportunity to sound them out about what they can offer, how they charge, or just to get a general sense of them.

THE PROCESS
By the time you choose an adviser, you should already be clear as to how they charge and what the process entails.

“A lot of work is done at the initial stage to assess the needs of a client and identify their current situation,” says certified financial planner Paddy McGettigan.

This starts with a free consultation,

Advice shouldn’t be based on an adviser’s commission but what’s right for the investor

followed by a fee-based process that entails a further consultation to answer queries, followed by the creation of a full financial plan.

“After this, products come into the conversation to help with specific needs,” he says. “Implementation of a product, and ongoing management, will be paid either via an ongoing fee or as a percentage of assets under management.”

McGettigan says the option used depends on “what is most efficient for the client on a tax-efficiency and cost basis”.

FEES AND COMMISSION
Consumers are usually offered a choice of either paying their adviser directly by fee or via commission paid to the adviser by the product provider.

Even with commissions, you still end up paying over time; it’s just a little less obvious precisely how much. That’s because the provider will claw back any commission from ongoing charges for the product, which come straight out of your investment each year. So tease this out with your adviser and be direct about it. Ask “how much will it cost me if I pay a fee now and how much if I don’t?” and get as many specifics as you can.

“When given the choice between putting their hand in their pocket and giving over cash, or working it into the cost of the product [via commission], they [customers] prefer the latter,” Rachel McGovern, director of financial services with Brokers Ireland, says.

She adds that the existence of the commission option means that not having the cash to pay fees to an adviser should not deter anyone from seeking financial advice. “Some people can’t afford to pay fees and may put off engaging with a financial adviser because of that.”

According to Ralph Benson, co-founder and head of financial advice at Money cube, some people prefer paying fees “to remove the risk of a conflict of interest, where financial advice is influenced by the commission on offer, rather than what’s right for the investor”.

Central Bank regulations that came into effect in 2020 obliged all financial advisers to set out their fees and commissions clearly. Unlike regulators in the UK, however, it stopped short of banning adviser commissions outright.

In practice, the requirement to publish charges has not quite provided the clarity the regulator was hoping for, says Benson. “It just means a lot of them share a long list of gobbledegook rather than a plain English summary.”

Among the things to watch out for when assessing a potential adviser’s fees include whether they are charging both commission and an hourly rate. This, says Benson, amounts to your paying twice for the same thing. Many advisers will offset one of these against the other, but clarify whether this is the case.

Another issue is whether they charge an upfront commission or set-up fees at the outset of your investment. In other words, check whether 100 per cent of your money is being invested from day one.

Finally, says McGovern, it is a mistake to assume that financial advice is the preserve of the wealthy. “Financial literacy isn’t where it should be in Ireland and, if anything, those who are less well off could probably benefit more from advice. It’s often not until people seek professional advice that they begin to realise the importance it can have in their lives.”