What is an IFA?
Definitions According to the Consumer's Association. an 'Independent Financial Adviser' is a product salesman.
According to the IFA trade bodies, an IFA is a skilled professional.
You should first be very clear on what you're using an IFA for.
IFAs are almost always paid on a commission basis, so a 'successful' IFA may be someone who sells a lot. If you ask a Certified Financial Planner what percentage of financial products being sold today do more harm than good, you'll probably get a reply which is 'in excess of 50%'. So if an IFA drives up to your house in a Maserati, I wouldn't jump to the conclusion that he or she must be a 'good' one. The definition of a 'good' IFA is different to a 'successful' one.
There's no 'best advice' standard. It doesn't exist.
You might still be expecting IFAs to produce 'best advice'. Even some journalists still quote this standard as a fact, which it isn't. When Richard Cockroft, past Director of Practice at FIMBRA (a regulatory body) announced the departure of the phrase 'best advice' from their rule book, he said it was for clarity, and that it wasn't really appropriate for an industry that existed to sell products (that’s paraphrased).
IFAs are expected to come up with a 'suitable product', not 'best solution'. There's a big difference.
How do I find a good one? You should understand that the (current) competitive pressure of the marketplace serves to drive out the good IFAs. A good IFA is someone who understands his or her products, knows their limitations, and can accurately identify when a product can help, and when it won't.
This is a higher standard of care than we expect of our newspaper editors. We're asking IFAs to accept lower pay, or none, where they identify that no product will help.
It is not correct to assume that a good IFA attracts more clients: they don't. It is often the case that good IFAs earn less than their aggressive sales colleagues. Where the public get good advice not to buy a product, they don't experience a feeling of value, so they don't have an incentive to return. Only 25 years later do they realise that they 'made a good decision'. The Office of Fair Trading wrote about this problem in their report on 'Consumer Detriment in Uncompetitive Markets'.
So who can tell you who is a good IFA?
Any professional (planner / accountant / solicitor / tax adviser) who uses IFAs, and is not in receipt of a share of commission from them.
How do I use them?
1. Make sure you know what kind of product you want to buy and what product you want advice on.
(If you don't, then you don't need an IFA, you need a planner: go to www.financialplanning.org.uk and search for a Certified Financial Plannerâ„¢ who will charge you a fee for the advice on what's best for you.)
2. Give the IFA a written letter requesting their advice as to the best product to do a certain task which you set. For instance, if you're interested in critical health insurance, the letter might ask for "the best-value product which provides £200,000 if I become critically ill within the next 20 years, with underwriting agreed on acceptance, with no encashment value, and without conversion rights." The more you know about the product, the easier you'll find it to be to write this instruction.
3. If you want to be really careful, review their advice with another IFA who you'll pay for a second opinion.
4. It is fair to pay the IFA for their work, by fee or commission. But you will improve the chances of getting good product advice if you first agree the amount you will pay. In other words, remove any commission bias by making all product sales produce the same revenue for the IFA.
