Welcome to this week’s On The Money newsletter. One of the questions I get asked most often is whom I would advise as a financial adviser.
The answer I give each time is the same: I won’t. It’s not that I’m being curmudgeonly or secreting away a gem so that only I and a select few others have the benefit of their genius; it’s much more prosaic than that. Choosing a financial adviser is a very personal exercise. What works for me might very well not for you.
It depends on the area in which you are seeking advice, the way you prefer to pay for it and the chemistry between you and the adviser. You are making potentially major decisions on the back of what they suggest, so you want to be sure that there is a level of trust between you.
It’s not that you need to be “besties” but you do need to be certain they understand what you are looking to do and confident that they will act in your best interest, not simply in pursuit of the biggest payday either from you or the product provider.
We are all (hopefully) proficient in our own fields but, unless you work in the area, investing can be intimidating, with myriad options, often arcane charging structures and varying regulatory protection.
If we are lucky enough to have a windfall or prudent enough to have built up substantial savings, the last thing most people want to do is risk losing it.
And that brings us to possibly the most important issue – risk, and your attitude to it.
People read reports of outsize returns at hedge funds, in cryptocurrencies or fund managers with the golden touch and think success is a one-way street. But point them in direction of the headlines when those funds are nursing losses, crypto has swung wildly or that favoured manager’s winning run comes to an end and they sober up very quickly.
It’s no use going to someone with a reputation for advising on crypto assets if you have a relatively low tolerance of risk. And, in my experience, Irish investors in general are risk averse.
The one great exercise in shareholder democracy here was the flotation of what was then called Telecom Éireann, now Eir. People who had never even thought to buy a share flocked to the market, tempted by a slick government-run marketing campaign and the history of companies’ share prices growing strongly from initial public offering.
In the event, the vast majority lost money, a chastening experience that remains fresh in the mind 24 years on as many of those investors still hold shares in Vodafone and Verizon that came to them through the sale and merging of various parts of the business over time.
That attitude to risk may be changing if everything we hear about younger people investing in crypto assets is real but time will tell.
Having sorted out your attitude to risk, there are some things you should bear in mind if you are fortunate enough to have funds to invest and are looking for advice.
Are you buying property or investing in funds or shares?
First up, what sort of investment are you considering. Are you looking to set up or enhance a pension fund; buying property; investing in funds or shares; trying to be more tax efficient, buying a life insurance product or looking for guidance on money you may have inherited or received as a lump sum when you retire or were made redundant? Different firms specialise in different areas.
The Central Bank has a database of what each firm is licensed to do. You can either enter a company name to get some information on that or simply check the relevant register of companies.
Then you want to be aware of the status of the adviser you are looking at. Are they a tied agent, able to sell only the products of the business to which they are tied? Or maybe, they are muti-agency intermediaries, a mouthful that means they are not entirely independent but they do market products from a number of different providers.
Bear in mind that the same adviser can be multi-agency when advising on certain areas but tied to one supplier of products in other areas. It is important to be very clear on where they are coming from.
Then you have authorised advisers, also called fair analysis advisers. These need to be able to scan the entire market and recommend the best product for you, regardless of the provider.
An investment adviser is, in any case, obliged to tell you whether their advice is independent or not.
More recently, we have seen the rise of robo-advisers – essentially bots using algorithms to direct you to certain products based on your answers to questions. Given the absence of human interaction, these should be cheaper; whether they’re the best option is a separate issue.
Then you need to consider how you are going to pay for the service. Essentially, there are two ways – either you pay up front in cash or the adviser will be paid in one or more forms of commission by the provider whose product you purchase – either off your initial investment or as a percentage of your fund over its investment lifetime, or both.
I’ve always argued that upfront payment is best in that it is very clear that there is no benefit financially to the adviser by recommending one product over another. Many people in the industry whom I know argue that regulation of the sector is so tight that consumers should be confident that no adviser will recommend anything other than a suitable product – and that’s a fair point.
There’s also the fact that most Irish people seem painfully uncomfortable with the idea of parting with some of their money before they have seen any return; commissions somehow seem less onerous although they can often amount to high payments. In any case, it can be difficult to track down a fee-based adviser.
Either way, you need to be very clear in your mind what and how you are paying for the service.
To find out how costs and range of products on offer compares, you will inevitably need to talk to more than one adviser.
You need to know how comprehensive their offering, what track record they have in the performance of funds they market or recommend to clients; have they ever been subject to complaints; How long have they been in business and what qualifications do they have that might reassure.
Financial adviser jargon
One of the biggest tests I personally have is do they try to befuddle you with industry talk or can they explain what they do in plain English so that you fully understand what you are signing up to.
It is astonishing how many advisers are confident of their ability to explain products, charges etc to clients only to lapse into jargon and acronyms that leave the client’s head spinning. If you do not clearly understand what you are being pitched, ask the adviser to explain it in a way that does make sense or walk away and try someone else.
Often, even a glance at an adviser’s website will reassure or raise some alarm. I can think of one where the “About Us” page is a picture of clarity in terms of what they do, who regulates them (giving you a link to the regulator’s site), states clearly that they are indemnified and for how much (and in this case adds cheerfully that they have never needed to resort to it). The whole presentation of it is designed to reassure, and it does.
Finally, ask around. Word of mouth recommendations are often the most valuable because no one is going to recommend someone they have not had a good experience with.
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.
