How do I find a good independent financial adviser (IFA)? It's a question I get asked a few times a month during most of the year, but every 10 minutes or so in the run-up to the end of the tax year.
It isn't an easy one to answer. I don't use an IFA myself, I don't have a firm of advisers I particularly approve of and, like most of the nation, I am faintly suspicious of the profession as a whole.
Why? Simple. Because the vast majority of IFAs are still paid not in upfront fees (like lawyers), but in commissions paid out by the providers of the products they flog (like car salesmen) and to me that just doesn't make any sense.
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The IFAs may swear it isn't true (and every time I write about it they e-mail in droves and say exactly that) but any system that forces so-called professionals to rely on commissions to pay their mortgage is inherently corrupting.
It simply isn't possible to believe that all IFAs can be so morally sound that they constantly recommend the products most suitable for their clients rather than those that pay them the most commission. It doesn't matter how many studies the profession produces that "prove" there is no such thing as commission bias, I know it isn't true.
I know it because it's obvious (human nature being what it is) but also because, being on the same distribution lists as journalists who write for trade magazines for IFAs, I constantly get press releases about how advisers can earn 4%, 5% or even 6% upfront for persuading clients into particular funds or products. Product providers aren't stupid well, not when it comes to marketing. They've been incentivising IFAs like this for years if it didn't work they wouldn't do it.
This is not to say that there are no good IFAs out there. Of course there are. Thousands now make it clear that they are proper professional business people, offering a real service rather than just smooth-talking gangs of salesmen by charging a set fee per hour of work and rebating all commissions to their clients.
The rest are at least being forced to justify themselves by the new menu system, which makes them lay out their total charges much more clearly than before. However, I don't think I'll feel happy until the commission system has gone completely, and the only way this is going to happen is for the consumer to insist on only ever paying flat fees.
The IFAs who complain to me when I complain about them tell me that lots of people cannot afford to pay for financial advice upfront by the hour so they want to pay commissions despite the fact that they can end up costing hundreds and often thousands of pounds more (the commission comes out of the money you invest).
This is a nonsense argument. Anyone who cannot put their hands on the few hundred pounds needed to pay an IFA a flat fee probably doesn't need an IFA and should be told so. Until you are debt-free (mortgage excluded) and have six months' worth of savings in a good deposit account, you aren't ready to start saving into a pension, other than one your employer may offer, and you certainly aren't ready to buy much in the way of investment products.
And once you are debt-free and have cash savings you can afford fees. So what's the prob-lem? I haven't yet come across a good case for the commission system. I suspect this is because there isn't one.
So the first part of the answer to the question of finding a good IFA is to make sure you get one that charges fees. If you can't find a good one via word of mouth, go to unbiased.co.uk and look one up. The site allows you to specify your needs (right down to whether you want to talk to a man or woman), including how you intend to pay. Click on "fee" and you'll already have gone some way towards getting good financial advice.
Click on commission instead and you run the risk of paying too much for products you may not need, and also of never hearing about the simple, cheap ones.
I wonder, for example, how many commission-paying clients have heard of the new exchange-traded funds from Barclays Global Investors. ETFs are very simple funds that track indexes or bundles of stocks but that trade in exactly the same way as individual shares. As such they pay no commission at all to IFAs if you want them you simply buy them via a stockbroker (preferably a cheap, online one).
Barclays has been active in the ETF market for some time now you can buy its ETFs on the London Stock Exchange, giving you exposure to anything from Tai-wan to a basket of infrastructure shares. The new ones provide exposure to UK property, private equity and water.
I'm not sure I'd bother with the first of these (the smart money is on the way out of property) nor perhaps the second given how long the private-equity boom has been running, but I love the idea of the third (iShares S&P Global Water).
I've written here before about how water is not only more important to us than oil but how it is in even shorter supply. Clean water supplies and infrastructure are critical issues for many countries, with the likes of China, India and Saudi Arabia spending billions to improve supplies to their growing populations.
It is really good news that there is a simple and cheap way to get exposure to the sector. This ETF is going to be the first investment I make inside my personal pension this year.
Merryn Somerset Webb is a former stockbroker and now editor of Money Week. Her views are personal and investors should always seek professional advice
First published in The Sunday Times 8/4/07
