Q On the death of my father I have inherited Pounds 98,000 which is currently sitting in a building society. I know I could get a much better return on the money by moving it out of this account but I am unsure what to do next. Is it always best in such circumstances to contact an independent financial adviser? The reason I am hesitant to do so is that I have been told they can charge Pounds 1,000 for their services. This would be a sound investment if the advice was good, but there is always the possibility that I could pay such a sum and then be badly guided. How can I be sure that the adviser is as well-informed as he claims to be?
A If you have no experience of investment matters it will be best to consult an independent adviser. Many insurance companies and other financial institutions offer good advice as well, but when it comes to recommending investments they can only sell you their own products and, unless you are able to judge different products on their merits yourself, you might be sold something uncompetitive.
Finding a good financial adviser is very difficult. In theory, the financial services regulators are meant to vet financial advisers on a regular basis to ensure that they are competent, honest and well trained, but as you will know from reading the Press over the past few years this does not prevent bad and incompetent advice from being given. You should ask any adviser you approach which regulator he belongs to, when he last had a compliance visit and did that visit reveal any problems, what professional exams has he taken as part of his training and how much relevant investment experience he has.
Regarding cost, financial advisers are either remunerated by commission, which is paid to them by the institutions whose products they sell, or on a fee-paying basis, in which case the client pays the fee, usually calculated on a time-costed formula. Some will work on a mixture of the two.
Commission is the traditional method of remuneration for financial advisers and reflects the industry's background in the sales-orientated insurance industry - you may have heard the old insurance salesman's maxim that "insurance is never bought, it is always sold". The advantage of commission-based advice is that the client pays nothing directly for the advice he receives, although the commission costs are reflected in the charging structure of the products he is sold. The disadvantage is that there is no incentive for the adviser to consider investments which do not pay him a commission, for example, National Savings Certificates, so his advice may not be completely impartial.
Fee-based advice is becoming more common as a result of adverse Press comment about the amount of commission payable on insurance-related investment business and the advent of the disclosure regulation, which come into force on January 1, 1995 and will oblige advisers to disclose the amount of commission they earn to clients. Fees have the advantage that they are normally based on the time spent advising you, rather than expressed as a percentage of the amount you invest, and they are implicitly disclosed to the client. Some people also feel that it is a more professional means of remuneration and is likely to keep the adviser's advice impartial. The disadvantage is that you must pay VAT on fees which is not payable on commission.
For an investment of Pounds 98,000 you should expect to pay commission of between Pounds 2,900 and Pounds 4,900. By contrast, a fee-based adviser like Bacon and Woodrow would be likely to charge you between Pounds 1,500 to Pounds 2,000 plus VAT and would place the investments on nil-commission terms (that is, the charging structure of the investments is reduced to reflect the fact that no commission has been paid). The fee is likely to be the same no matter how much you invest, so you can see that fees probably offer better value for money than commission to people who have more than around Pounds 50,000 to invest . Below this figure, commission-based advisers probably offer better value for money.
Readers wishing to put questions to Andrew Warwick-Thompson (no names will be published) should write to the Personal Finance desk, The TES, Admiral House, 66-68 East Smithfield, London E1 9XY. No correspondence will be entered into and no legal liability accepted for the advice offered.