5 min read

Top myths about financial advice

Financial advice has a pretty poor reputation in the UK. But seeking expert, impartial help with the likes of mortgages, pensions or equity release can help ensure you’re doing the right financial planning. This in turn should help keep the cost of borrowing to a minimum.

Financial adviser talking to a man and woman

So why are so many people reluctant to approach financial advisers or a similar service? One of the main reasons is the number of scandals that, in the past, have been linked to misleading financial advice.

Scandals in the past

Take endowment mortgages, for example. In the 1980s and 1990s, thousands of homeowners were advised to take out home loans that were linked to stock-market investments. The idea was the investments would grow over the course of a decade or two, and would eventually be enough to pay off the mortgage capital with a handy profit to boot.

But returns were lower than expected, and many customers found themselves facing shortfalls of thousands of pounds. It then turned out that the people who had recommended the mortgages – typically advisers working for major mortgage lenders – had been given significant financial incentives to persuade borrowers to opt for endowments.

Indeed, many mis-selling scandals in the past have been linked to undisclosed incentives and commission payments on offer to advisors.

A new system

So what’s changed – and why should you put your trust in today’s advisers? The key development in recent years has been the introduction by City watchdog the Financial Conduct Authority of a set of rules called the Retail Distribution Review, or RDR.

The RDR came into force in 2013 and in effect banned financial advisers from getting commission on the financial products they recommended to clients. The theory was that this was likely to ensure they offered impartial advice based on the requirements and wishes of their customers.

Under this new system, those seeking a financial adviser will in most cases end up paying a clearly set out fee for the advice they receive.

Paying for advice

But if you think this means you now have to pay for advice that in the past you would have got for free, that’s not really the case. Under the old commission-based system, customers would have effectively paid for their advice through the ongoing charges on investment funds, for example, or through higher administration costs on a mortgage.

The only real difference is that now the true cost of the advice is easier to identify and usually disclosed upfront.

Is advice worth the money?

Different companies charge for advice in different ways. In some cases, the cost will be based on the size of the investment you make or the loan you take out. Other financial advisers will charge a fixed, flat-rate fee regardless of the size of any subsequent transaction.

It’s unlikely to be worthwhile to seek financial advice when you are choosing a new credit card, say. But for the likes of mortgages, pensions and equity release, where the sums involved can often run into the hundreds of thousands of pounds, advice can be extremely cost-effective. A mortgage adviser charging a one-off fee of £500, for example, could quite easily save a borrower far more than that over the course of a loan by tracking down the most suitable deal.

Does the advice cover all your options?

One final factor to consider when getting advice is whether the adviser can compare products from all the providers in the market. If you go to an independent financial adviser, they should be able to offer guidance on a wide range of financial products from all possible sources.

In other cases, advisers may just cover one type of product – mortgages or equity release, for example. If this is the case, check whether the deals they can recommend may be selected from the “whole of the market”, or if they are restricted to those available from just a handful of providers.

In theory, if your adviser has more providers to choose from, you should stand a better chance of getting a deal that suits your requirements at the best price. But providers themselves can also offer impartial advice, so it could be worth keeping this in mind too.

Written by Chris Torney – Financial Journalist

 

Note: Whilst we take care to ensure Talking Finance content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decision. The opinions expressed within this blog are those of the author and not necessarily of OneFamily.