What is a Financial Adviser?

The term financial adviser is as broad and misleading as the terms consultant and engineer. It can mean anything from the one-man band who sells everything from motor insurance to mortgages to the well-resourced professional firms of stockbrokers, chartered accountants and solicitors.

There are more than 27,000 independent financial advisers (IFAs) in the UK, several thousand more professional advisers (accountants and solicitors who give investment advice, for example) and a further 70,000 company representatives who work for financial institutions.

Your starting point is to consider carefully what you want, not what they sell. Under the Financial Services Act (FSA) 1986 it is a criminal offence to give investment advice without being authorised. The regulatory system has been criticised for being too slow. Several mainstream investments - personal pensions, endowments and home income plans, for example - have been the subject of major misspelling scandals. Caveat emptor - buyer beware - is as important today as it ever was.

The FSA covers every firm or company providing investment advice or an investment service. If someone gives you advice on products covered by the Act and is not authorised, he or she is breaking the law. You can check authorization by making a quick phone call to the FSA, which runs a comprehensive database. Details are provided at the end of this chapter. Appendix 3 deals with complaints.

The Act doesn't cover everything

Not everything sold as an investment has to be authorised. Most regulated investments are non-tangible assets like shares, gilts, bonds and collective funds. When you buy physical or tangible assets directly rather than through a collective fund - gold coins, rare stamps, antiques, vintage cars and wines, for example - you are not covered by the Act. This means the FSA regulators cannot investigate your case and you are not entitled to compensation if things go wrong.

Types of adviser

Under the FSA, advisers are split into two broad categories. Representatives of a company are authorised to sell only that company's products and this will be stated on the letterhead and terms of business agreement. Representatives are not permitted to recommend other products, even if they are better. IFAs are not tied to one company. Their job is to examine your needs and to search the market for products that offer the best value in terms of performance, charges and contract flexibility, among other factors.

In theory at least, you stand a better chance of coming away with the right insurances and investments than if you go to a company representative. In practice many commission-based IFAs focus on selling products rather than providing overall advice. Moreover, the term independent is not synonymous with expert. Some firms are excellent, others are less knowledgeable, while a minority are less than scrupulous.