It has become fashionable in recent times for anyone and everyone in Financial Services to set up a Wealth or Asset Management Company. In fact, at present someone could sit a few basic exams and within 2 – 3 months call themselves a financial adviser.
In previous years the minimum requirement to become a financial adviser was a Certificate in Financial Planning which was really the equivalent of a GCSE. The Financial Services Authority (FSA) recognised this is not adequate and set a minimum requirement of a Diploma in Financial Planning, to be attained by all advisers by the end of 2012.
A level above diploma is the Chartered Financial Planner qualification, the highest qualification in the industry. Many of the titles available to advisers are not well understood outside of the profession, however the Chartered mark is. It is widely understood by the public as it is common among other professions. The use of the title puts wealth managers and financial advisers on a footing with accountants and other Chartered professionals.
Looking beyond qualifications, investors should be asking other questions to determine if a firm can competently manage their wealth.
How Is Your Money Managed?
Is it passively managed? i.e. Advisory? Or is it actively managed? i.e. Discretionary? Passive management (Advisory) would mean the adviser selects funds with agreement from the client and any fund changes require written authority from the client. This may provide comfort, but it is impossible for the adviser to manage if they have more than a few clients.
Under the active management (discretionary) mandate, changes are made for clients without continually requesting signature or approval. This approach ensures changes are made efficiently and, in truth, is the only true way risk can be managed effectively. This approach would ensure the portfolio is continually managed in line with the original risk profile.
Any investment portfolio should be structured to try and achieve the required returns by taking the minimum amount of risk. This requires the right asset allocation, tax and charging structure across all of your assets.
Does your adviser/fund manager know where the risk is? Seems like a basic question yet in recent times we have clear examples where advisers and companies did not – BP, Madoff and Barclays. A genuine Wealth Management firm would know where every penny is invested so that it is not over exposed to one particular fund and is not being marketed as a cautious managed fund with the potential to lose 25 % in one year.
Paying for Advice.
How does your financial adviser charge for their services? Fees or Commissions? If it is by commission, then it is an indirect cost that you are paying. It can be dressed up as a charge or fee paid for by the generous insurance/investment company, but in reality it is you that will be paying for it. The commission-based adviser will only get paid on selling products and on recommending a product that pays commission. There may also be a product bias as different products pay different levels of commission. This leads to certain products being overlooked and to inappropriate advice.
By opting to pay an adviser a fee for advice this will ensure you receive advice that is right for you and not advice that is linked to product sales. Whilst this is a direct cost, you should be confident that the adviser will have your best interest at heart. Consumers should also be aware of commissions being paid to offset or pay their advisers’ fee – it is never going to equate to the time spent and is still commission-based advice.
These simple questions will pose a few headaches for many, but should ensure you get independent and impartial advice on your financial affairs. A company with the right experience will understand the options available to you and can help you achieve your overall financial goals.