Conflicts of interest with a financial adviser: what to consider
What if your interests don’t align with those of your financial adviser? This is called a conflict of interest. We explore conflicts of interest and how they could affect your financial goals.
Does your financial adviser have your best interests at heart? What if their goals don’t align with yours?
This is known as a conflict of interest.
Conflicts of interest can arise when your financial adviser has an agenda that differs from yours, which may cloud their judgment and mean they may not offer independent advice.
Some financial advisers could have a conflict of interest.
Restricted and independent financial advisers are different and have different fee structures.
If the adviser is restricted in the type of advice they can provide, they must explain the restriction to you and put it in writing.
You can seek redress from the Financial Ombudsman Service (FOS) if you have been given bad advice or mis-sold a financial product.
What are common conflicts of interest that might occur with a financial adviser?
There are a few common conflicts of interest worth considering.
For example, an adviser might want to sell you certain financial products, such as an insurance policy, because they are financially incentivised to do so, not because these are the best options for you and your family.
If they are managing a share portfolio, they could be incentivised to select certain investments because they could receive fees for doing so.
Under Financial Conduct Authority (FCA) rules, investment companies are required to manage conflicts of interest fairly, both between themselves and their customers and between a customer and another client.
The FCA regulate the conduct of around 42,000 businesses in the UK to ensure that financial markets work well.
Firms and individuals must be authorised or registered by the FCA to carry out certain activities.
Before authorisation is granted, firms must demonstrate that they meet a range of requirements. The FCA then supervise these firms to make sure they continue to meet their standards and rules after they’re authorised.
What’s the difference between a restricted and an independent financial adviser?
There is a difference between financial advisers who may work for an investment firm and those who are independent.
Restricted financial advisers will only promote financial or insurance products sold by certain companies. Their advice may come for free, but they may receive a commission on the purchase of certain investment, mortgage or insurance products.
In contrast, independent financial advisers will charge a fee for their advice, but can recommend a range of products from different firms as they aren’t tied to a limited number.
If a financial adviser provides advice about pensions, investments or retirement income products, such as annuities, they cannot receive commission on these products but must charge you a fee for their advice.
However, those giving advice on mortgages, general insurance, protection insurance (such as life insurance), or equity release can be paid a commission by the product provider.
How do I avoid a conflict of interest with my financial adviser?
The first time you meet with your prospective financial adviser, they must put in writing whether the type of advice they can provide you with is restricted or independent.
If the adviser is restricted in the type of advice they can provide, they must explain the restriction to you. For example, they might be they can only give advice on financial products from certain companies or advice on certain areas of expertise.
Both types of adviser are authorised and regulated by the FCA to provide financial advice, and must have a minimum qualification (Level 4 Diploma for financial advisers) regardless of their status.
Don’t be afraid to ask your financial adviser questions about their fee structure or request recommendations from previous clients. Find out about their background before committing to using their services.
Weighing up all the information will help you decide which financial adviser to select and reduce the likelihood of conflicts of interest.
Should I get a second opinion?
If you are uncertain about the advice you have received from a financial adviser, it may be wise to get a second opinion.
Although you will have to pay for advice from an independent financial adviser, it can be worth it to get access to a wider range of financial products.
Often, it can be a good idea to get quotes from three different financial advisers in the first instance so that you can compare them.
Fees for advice can vary, but the hourly average in the UK is £150. However, the first session with a financial adviser is usually free.
How do you seek redress if you have been mis-sold a financial product?
Financial advisers are regulated by the FCA, which means if you are unhappy with the advice you are given or think you have been mis-sold a product, you can seek redress through the FOS.
However, you won’t receive compensation if your investments fall in value or if a company you own shares in goes into administration, unless you received bad advice from your financial adviser.
Under the Financial Services Compensation Scheme (FSCS), you are also covered for up to £85,000 of investments per person, per product. You can make a claim online for free, and you do not need to go through a claims company.
Always take your time before selecting a financial adviser to ensure they have your best interests at heart. Research their background and ask about their fee structure.
Remember that they must put it in writing to you whether their advice is restricted in any way or independent.
Unbiased can help you find a qualified financial adviser to help you reach your future financial goals.
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