www.InvestmentGuide.co.uk
www.InvestmentGuide.co.uk Investments and investment advisers are regulated by law. In 1988 the then Financial Services Act was intended to improve the quality of financial and investment advice and to reduce the chance of you losing money through fraud, poor advice or incompetence by an agent of an investment institution.
In 2000, 12 years later another major reform took place, concluding the merger of dozens of regulatory bodies into one main organisation the Financial Services Authority.
One achievement of the 1988 Act was to compile lists of people who are allowed to give financial or 'investment advice'. Only firms or people on these lists, apart from the media which is in most cases exempt, are allowed to give investment advice to the public. Originally none of the list makers attempted to judge the competence or qualifications of advisers although most of the advisers will have been qualified by experience as having given investment advice in the past.
Since 27 August 1988 there has also been a compensation scheme for investors if an adviser goes bust after that date owing you money. This applies to all authorised UK financial advisers. For details of compensation for this and other types of investments, click here.
If your adviser belongs instead, or in addition, to one of the other regulatory organisations like the Law Society, you can be entitled to better compensation.
If you want to check whether an adviser is fully authorised, and by whom, contact the Financial Services Authority Central Register.
Bear in mind that this compensation scheme will not protect you against poor advice. To do that you need to have knowledge yourself which you can gain from this and other web sites.
Which investment advice
'Investment advice' does not cover deposits in banks, building societies, co-operative societies or National Savings. So anyone is allowed to give you advice on these types of investment. Indeed if a registered adviser gives you poor advice on deposits, you won't have any come-back on the adviser.
Banks and building societies which offer deposit based pension schemes, i.e. additional voluntary contributions or a personal pension, based on their own deposits, as opposed to pension schemes issued by life insurance companies and unit trusts for which they act as agents, are not covered by the Act either.
Since 31 October 2004 advice on mortgages has been brought under the control of the Financial Services Authority.
Which type of adviser
According to the rules an adviser can be one of two types: an tied adviser or an independent financial adviser. Tied advisers used to be able to only advise on the products of one single company or group of companies but since 1 January 2005, they are now allowed to offer a few products from other companies.
Independent financial advisers are supposed to choose the companies they use from all the ones available and only to recommend the best products for each particular client's circumstances. Don't expect to get good advice from a tied adviser, who can only offer a few products which may be the best he has but they almost certainly will not be the best available.
Banks and building societies although not covered by the Act for their own deposits are covered when they act as agents for life insurance policies and unit trusts for example. Most banks and building societies are now appointed representatives of one company although many will obtain independent advice on request.
Best advice
Investment advice (about, shares, unit trusts, life insurance, pensi\ons etc) is supposed to be best advice. That means the adviser is supposed to get detailed financial information from you before he or she gives you advice.
If you are reasonably well informed, as you will be as a reader of this site, you may find this tedious. If you don't want to give the adviser confidential information about yourself, you will probably have to sign a form saying so in which case you may not have a come-back if the advice turns out to be poor.
Despite all the rules, advisers still tend to go for products which pay them good commission. The better ones will offer you a discount by letting you have some of the commission but you should regard this really as a sales incentive - as the adviser is still motivated by generating commission.
Some independent financial advisers work on a fee basis. They charge, say, £250 for the advice they give. Commission on £10,000 invested in a unit trust or lump sum pension could be 2% to 5% which comes to £200 to £500. The difference is refunded to you, usually by enhancing the allocation of your investment. In the example with only 2% commission you don't benefit from paying a fee. But with larger investments, this method can amount to a very effective discount: eg 5% of £20,000 is £1,000 less £250 gives you £750.
Bear in mind that some fee based advisers may charge fees far in excess of £250 so find out the basis at the outset. There are also some advisers who split the commission with you. Be careful with those which charge by the hour; their bill could give you a shock.
It may be that you decide you don't want independent financial advice. You may therefore be inclined to deal with the financial institution (e.g. unit trust group) direct. However if you employ a solicitor or accountant and pay them fees to do other work for you, you would be better off using them as a post box for your application forms. The financial institution will pay the solicitor or accountant commission usually at the same rate as to any other financial adviser. The solicitor or accountant will set this amount as a credit against fees you incur with him for other work he does.
You complete the application form and make the cheque payable to the unit trust group or whatever in the usual way. On the form you will find a space for the 'Stamp' of an independent financial adviser. You can usually just write in the name and address of your solicitor or accountant. Or if you prefer, you can send the cheque and form to your solicitor or accountant and ask them to forward it to the financial institution for you after stamping it with their stamp.
Either way write to the solicitor or accountant saying you are nominating them to receive the commission so that it can be used against fees incurred by yourself or members of your family. If you send the form direct, send the solicitor or accountant a photocopy of the form, so he or she is in the know.
This only really works well if you don't ask for advice; if you do, you can expect the solicitor or accountant to charge a fee for the advice which will use up part or all of the commission. State in your letter to the solicitor or accountant that 'I don't require and have not received any financial advice from you and this transaction is on an execution only basis'.
The advisers you are likely to come across are as follows:
The regulatory organisations
All forms of investment in the UK are now regulated by the FSA or Financial Services Authority .
If you have to complain
If you have a dispute with any financial organisation which is not resolved to your satisfaction by the manager of the department you are dealing with, you should find out the name of the Chief Executive and write with your complaint. If your complaint is still not resolved, you can then try and use The Financial Ombudsman Service. It doesn't all cover every type of complaint but can award compensation of up £100,000.
Protecting yourself
Advice if you send a large cheque through the post.
 Last updated 25 November 2008. |
Previous chapter | Next chapter |
| Shares A Beginners Guide to Making Money | The Money Code |
| If there's anything you think should be included or you don't understand Send us a message |