47

First things first, this isn't a "recommend a good financial advisor" question.

I'm looking for advice on how best to approach the world of assisted personal finance & investing. I'm currently at university in the UK and will be finished soon. I have some cash to play about with and I want to grow its value once I start work.

I have a basic understanding of financial instruments, but I have no experience in markets and trading.

  • 5
    Is this worth tagging "UK", and asking a separate similar question tagged "USA"? I think the answers could be quite different, especially with respect to regulation of advisers. – AndyT Sep 7 '16 at 16:23
  • 2
    Merely being a fiduciary (by the somewhat broad US standard) isn't nearly enough. After all, that commission based "financial advisor"also qualifies as a fiduciary since he is operating within the norms of the dominant industry, even if it is inhererntly corrupt. Plus, they made full disclosure... Right there on page 79. – Harper - Reinstate Monica Sep 7 '16 at 18:54
  • 1
    I'm curious why "assisted" is so important to you? Why aren't you just interested in "the world of personal finance & investing" instead? You're young and have "cash to play about with": to me that says you can afford to make some mistakes (if you're rash and make some) and have time to recover from them. YOU are the best person to assist yourself, and IMHO it's probably easier to learn about investing than it is to learn how to identify a good advisor. Cheaper too, in the long run. Monevator is a good resource monevator.com/highlights and links a lot of good stuff. – timday Sep 7 '16 at 20:58
  • 1
    @timday I agree with this. In some cases (like for the guy making $100,000 a month), it may be perfectly sensible to hire a financial advisor. However, I think a lot of people start handling money and just decide they should hire a financial advisor... without necessarily being able to explain why. – arbitrarystringofletters Sep 7 '16 at 22:04
  • 1
    Remember the old adage: if you want something done right, do it yourself. – Masked Man Sep 10 '16 at 3:33
52

You want a fee-only advisor. He charges like an architect or plumber: by the hour or some other "flat fee". That is his only compensation. He is not paid on commission at all. He is not affiliated with any financial services company of any kind.

His office is Starbucks. He does not have a well lit office like the commission broker down the street.

He does not want you to hand him your money - it stays in the brokerage account of your choice (within reason - some brokerage accounts are terrible and he'll tell you to get out of those). He never asks for the password to your brokerage account.

Edit: The UK recently outlawed commission brokers. These guys were competitive "sales types" who thrive on commissions, and probably went into other sales jobs. So right now, everyone is clamoring for the few proper financial advisors available. High demand is making them expensive. It may not be cost-effective to hire an advisor; you may need to learn it yourself. It's not that hard.

The bad guys

Ever hear of a plumber who works totally for free, and makes his money selling you wildly overpriced pipe? That's what regular "financial advisors" are.

They sell products that are deliberately made unnecessarily complex. The purpose is first, to conceal sales commissions and high internal fees; and second to confuse you, so the financial world feels so daunting that you feel like you need their help just to navigate it. They're trying to fry your brain so you'l just give up and trust them.

Products like whole life and variable annuities are only the poster children for how awful all of their financial products are. These products exist to fleece the consumer without quite breaking the law.

Of course, everyone goes to see them because they have well lit offices in every town, and they're free and easy to deal with.

You don't need to know all that.

Don't feel like you need to know everything about finance to invest. You don't need to understand every complex financial product that the brokerage houses bave dreamed up: they are designed to conceal and confuse, as I discuss above, and you don't want them.

The core of it is fairly simple, and that's all you really need to know.

Look at any smaller university and how they manage their endowments. If whole life, annuities and those complex financial "products" actually worked, university endowments would be full of them. But they're not! Endowments are generally made of investments you can understand. Partly because university boards are made of investment bankers who invented those products, and know what a ripoff they are.

But you do need to know what you're buying.

Some people refuse to learn anything. They are done with college and refuse to learn anything more. I hope that's not you.

Because you should learn the workings of everything you're investing in.

If you don't understand it, don't buy itl

And a fee-only financial advisor won't ask you to.

1000 well-heeled, well-advised university endowments seek the most successful products on the market... And end up choosing products you can understand. That's good news for you.

  • 10
    You had me at "He does not want you to hand him your money - it stays in the brokerage account of your choice" - this limits the potential for a scam. Madoff wasn't offering advice at any price, he was "investing" your money. We saw how that went. – JTP - Apologise to Monica Sep 7 '16 at 16:13
  • 18
    Surprisingly, this answer doesn't mention anything about making sure the adviser is a financial fiduciary. That seems like a big oversight. – HopelessN00b Sep 7 '16 at 16:43
  • 3
    "The purpose ... to confuse you, so the financial world feels so daunting that you feel like you need their help just to navigate it." Very important point. A financial advisor should teach you why. Blindly following advice is bad; you should feel informed along the way, and understand the reasons behind particular pieces of advice. – Grade 'Eh' Bacon Sep 7 '16 at 18:16
  • 3
    @HopelessN00b A fee-only advisor is a fiduciary by definition, since that is the entire purpose of the relationship. "Fiduciary" alone is a poor yardstick, since fiduciaries are allowed to rip you off blind, if they disclose (on page 79)... or if their practice is the norm in their industry. Even if that norm is considered obscenely corrupt by people like John Bogle or Dave Ramsey or many of us. – Harper - Reinstate Monica Sep 7 '16 at 18:33
  • 4
    "Fee only" sounds great in principle. However (while I've not actually tried to obtain any myself) my understanding is advisers offering such a service aren't really interested in looking at anything which will earn them less than ~1K (perhaps due to "regulatory burden"), which will make a big dent if the posters "money to play with" is less than six figures. Indeed one of the consequences of RDR and the end of commission-based advice in the UK seems to be that those with relatively small sums to invest are finding it harder to access any advice at all (a so-called "advice gap"; google it). – timday Sep 7 '16 at 23:40
13

If someone recommends a particular investment rather than a class of investments, assume they are getting a commission and walk away.

If someone recommends whole life insurance as an investment vehicle, walk away.

Find someone whose fiduciary responsibility is explicitly to you as their client. That legally obligated them to consider your best interests first. It doesn't guarantee they are good, but it's done protection against their being actively evil.

  • Commission-based investment financial advisors do not exist in the UK (unless you are dealing with either an illegal advisor, or an unregulated one, neither of which is likely for the OP). – JBentley Sep 8 '16 at 21:28
  • Not true. A long time ago I asked mine about investing in the index. He not only suggested ETFs (the usefulness of which I appreciated later), but recommended a specific broker and a specific ETF. I later found that the broker was very good, and that particular ETF can be had commission free through that broker. In all, the advisor gave me specific advice which was very good (if he had given general advice, I would have most likely opened an account with Vanguard, and then become dissatisfied). – Superbest Sep 8 '16 at 23:10
  • Life insurance can be a good investment if structured properly – hedgedandlevered Sep 9 '16 at 13:13
  • 1
    No. Life insurance is, by definition, statistically a losing bet. The only justification for it is to protect dependents. If you have no dependents who can't go on without your income, you don't need life insurance. – keshlam Sep 9 '16 at 21:46
7

The other answers are good, but not UK-specific.

You need to look for an Independent Financial Advisor (IFA). These are regulated by the FCA and you pay them a time-based fee for their services, they do not take commission on the products they recommend to you.

The Government Money Advice Service page (hat tip to @AndyT in the comments on the question for the link) tells you how to go about finding one of these and what sort of questions to ask. Contrary to the note in the answer by @Harper, in the UK many IFAs do have perfectly nice offices, this is not a sign that should put you off.

Personal recommendations for IFAs are usually the best way to go but failing that there are directories of them and many will have an initial conversation with you for free to ensure you are aligned with each other.

6

I think the other answers raise good points. But to your question, "How do I find an honest financial adviser" ask your friends and family. See who they talk to and confide in. Go meet that person, understand what they do and how they view things and if you gel, great. Honesty and strong ethics exist in individuals regardless of laws.

What is it you're trying to accomplish? You just have some money you want to put aside? You want to save for something? You want to start a budget or savings plan? Your first step may be talking to a tax person, not an investment adviser. Sometimes the most significant returns are generated when you simply retain more of your earnings and tax people know how to accomplish that.

You're just graduating university, you're just going to get your first job. You don't need to hunt for the right heavy hitter 30% gains generating financial adviser. You need to establish your financial foundation. Crawl, walk, then run.

There are some basics (that transcend international borders).

  • Get rid of your debt
  • Establish an emergency savings account
  • Establish some longer term savings account
  • Contribute something to a retirement account
  • Maybe open your own individual brokerage account

If you don't know much about investing, most (if not all) retirement and individual brokerage type accounts will give you access to some kind of market index fund. You don't need to multinationally diversify in to high fee funds because "emerging markets are screaming right now." Typically, over a few years the fees you pay in the more exotic asset classes will eat up the gains you've made compared to a very low fee market index fund.

You can open free accounts at a number of financial institutions. These free accounts at these banks all have a list of zero commission zero load funds, all have something resembling an index fund. You can open your account for free, deposit your money for free, and buy shares in an index fund for free.

  • 21
    Oh, no! Don't ask friends/family! People are deeply ego-invested about their financial choices and will insist you do things because they did. They want to believe they made good financial choices, and they will lead you down whatever primrose path they got suckered down... simply so they can keep that feeling of comfort put there by the smiling, reassuring broker. They tend to resist good advice. The root of all this wrong is picking advisors by social network and/or winning personality. Other than that, right on! – Harper - Reinstate Monica Sep 7 '16 at 19:07
  • @Harper, the point of my post is that at this person's stage of life they don't need a financial adviser at all and a conversation with a tax person will be much more valuable. – quid Sep 7 '16 at 19:08
  • Oh, even more right on then! Yes, if there's one advisor to talk to, it's a tax advisor. – Harper - Reinstate Monica Sep 7 '16 at 19:09
3

Large and well-known companies are typically a good starting point. That doesn't mean that they are the best or even above average good, but at least they don't cheat you and run with your money.

A core point is someone you pay, not the company whose investment he sell you. Although the latter seems cheaper on first glance, it isn't - if you pay him, his interest is to do good work for you; if they pay him, his interest is to sell you the product with the highest payment for him. That does not imply that they are all that way; it's just a risk. There are many good advisers that live from commissions, and still don't recommend you bad investments.

Depending on the amounts, you could also read up a bit and open an account with a online investment company. It is discussable, but I think the cost for an adviser only starts to become worth it if you are deep into 5 digits of money.

2

If your financial needs aren't complex, and mostly limited to portfolio management, consider looking into the newish thing called robo-advisers (proper term is "Automated investing services").

The difference is that robo-advisers use software to manage portfolios on a large scale, generating big economy of scale and therefore offering a much cheaper services than personal advisor would - and unless your financial needs are extremely complex, the state of the art of scaled up portfolio management is at the point that a human advisor really doesn't give you any value-add (and - as other answers noted - human advisor can easily bring in downsides such as conflict of interest and lack of fiduciary responsibility).

disclaimer: I indirectly derive my living from a company which derives a very small part of their income from a robo-adviser, therefore there's a possible small conflict of interest in my answer

  • Robo-advisers are an interesting trend. It's unclear to me whether there are any cheap ones operating in the UK though...yet. (Note the UK tag on this question.) Nutmeg seem to have been best at getting their name out there... but their fees are absurd... more like what you'd expect to pay a human wealth manager. Be interested to see some specific names for the UK mentioned. – timday Sep 11 '16 at 10:40
  • Funnily enough an article listing UK robo-advisers has just turned up at telegraph.co.uk/investing/isas/… ; good to see it pointing out holding a passive multi-asset like Vanguard Lifestrategy on a low-cost platform could be even cheaper. – timday Oct 23 '16 at 0:22
0

Most individuals do not need a personal financial advisor. If you are soon entering the world of work, your discretionary investments should be focused on index funds that you commit to over the long run. Indeed, the best advice I would give to anyone just starting out would be:

  1. Commit to a tax-advantaged retirement plan on the first day you start work and maximize your contribuitions. In the USA, these are either 401k or Roth accounts.
  2. Keep expenses low. New entrants to the world of work are more likely to let the money "burn a hole in their pockets" and waste money on frivolous purchases.
  3. Think seriously about where and how you live. Renting vs buying your residence is even more important over the long term than your financial investments.
  4. Stay out of low-quality debts like credit cards etc. Mortgages on the other hand can be considered higher-quality debts as they represent equity.
  5. Be insured. I know too many young people who put themselves at serious risk through under/non-insurance. Don't let an accident wipe you out.
  6. Any money that is left over, just put into index funds. An advisor may attempt to point you at exotic investments to justify their fees....you are not Warren Buffet...you are not the Harvard endowment fund, keep it simple.

For most average young workers, a financial advisor will just give you some version of the information above, but will change you for it.

I would not recommend a financial advisor as a necessity until you have seriously complicated taxes. Your taxes will not be complicated. Save your money.

  • 1
    This is poor advice for the UK, where 401ks and Roth accounts do not exist, and no young person needs health insurance. – Mike Scott Sep 10 '16 at 16:16
  • I didn't mean health insurance. I should have qualified my statement - liability insurance. Even if you do not own a home or car, you should carry an (equivalent) $1 million USD umbrella policy. Every adult can be sued, and if you are getting sued, it is too late to buy a policy. Everyone who has a positive net worth should carry liability insurance. What I meant by "don't let an accident wipe you out"...was a house guest falling down your stairs. Also you are wrong about the UK - ISAs are the UK's version of 401ks. Please Google before "correcting" someone. – Brad Clawsie Sep 12 '16 at 0:52
  • 1
    Young people in the UK don't need liability insurance, either. It's a less litigious society. And ISAs may indeed be a reasonable idea, but they're not 401ks. They're not even the "UK version" of 401ks, which would be a self-invested personal pension. You shouldn't be advising on investment plans unless you know the details, which aren't the same in the UK as in the US. – Mike Scott Sep 12 '16 at 5:27
  • 1
    Wikipedia says the UK is the world's second largest market for liability insurance..."The UK is the world’s second largest market for liability insurance, with USD 9.9 billion of liability premiums in 2013" (source: en.wikipedia.org/wiki/Liability_insurance ). So clearly someone there thinks there is a need for it. You're splitting hairs with the ISA/401k distinction...for the average worker, they are similar enough in intent. – Brad Clawsie Sep 13 '16 at 20:04
  • Also, a quick perusal of "most litigious nations" shows the UK consistently in the top ten, and in many cases nearly on par with the US (where you most certainly better have liability insurance). – Brad Clawsie Sep 13 '16 at 20:13

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.