The role of brokers and financial advisers

 

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Many people ask if it is worth using a financial adviser to arrange the mortgage and what are the advantages and disadvantages of taking this route.

Independent Financial Advisers | Tied agents | Unregulated Mortgage Brokers | Advantages and Disadvantages of using a Broker/Financial Adviser

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Many people ask if it is worth using a financial adviser to arrange the mortgage and what are the advantages and disadvantages of taking this route. There are really three types of broker operating in the UK market and before any other decisions are made it is worth making yourself familiar with the different categories of adviser so that you will know what to expect. The first thing to remember is that the category refers to their status in terms of selling regulated insurance products rather than their status as a mortgage adviser. At the current time there is no statutory regulation of the mortgage market although the industry has moved towards self-regulation with the introduction of the Mortgage Code which became operational in April 1998. This is dealt with in more detail in the next section. Let's now look at these three categories and see what they mean and how they differ;

Independent Financial Advisers

As was said previously the term Independent Financial Adviser refers to the individuals status in being able to sell regulated insurance products. Regulated insurance products are those which are covered by the Financial Services Act 1986 and this basically covers any product which has an element of investment attached to it. For example a pension plan would be regulated as would an endowment policy. However a simple term life assurance policy would not be regulated unless any element of the premium was used as investment, equally a buildings or contents insurance policy would not be regulated.

If an adviser is 'independent' this means that he is able to sell regulated insurance policies from the range of providers in the market. In theory this means that he will be able to seek out the most appropriate policy for your needs. In addition he will need to justify why he has chosen one policy over another and may be required to do so by the regulators if there was ever any complaint or query as to the suitability of the product recommended.

An Independent Financial Adviser will also, usually, be able to offer a range of mortgage products and will be required to be registered under the Mortgage Code to do this. You should always check that this is the case as not all Independent Financial Advisers will be registered under the Mortgage Code, particularly if mortgages are not an area that they wish to specialise in. In this case they may be a good choice for simple investment advice but they will not be in a position to arrange a mortgage on your behalf. It is also worth asking what percentage of their business is mortgage related. If they only arrange the occasional mortgage they may be out of touch with the market and may not have as much knowledge as a specialist mortgage broker.

Finally, you should not confuse an Independent Financial Adviser with an Independent Mortgage Broker. An adviser may advertise himself as an Independent Mortgage Broker when he is a tied agent of one insurance company. In other words, he may be independent in terms of which lender he can arrange the mortgage with but if you want him to arrange any life assurance, endowment policies or other investment plans he will only be able to recommend the products of one company. This may appear very confusing but the point to bear in mind is that there are basically two sides to an advisers role - one is to arrange the mortgage and the other to arrange any life assurance or investment products. If you bear this in mind when choosing your adviser you can acquaint yourself at the outset of the status of the adviser you are using. Remember an Independent Financial Adviser is able to recommend insurance and investment products from the market as a whole and an Independent Mortgage Broker is able to recommend a mortgage from the market as a whole. A tied agent can only recommend the insurance and investment products from the company that he/she represents. The role of the tied agent is covered next.

Tied Agents

Tied Agents can represent one insurance company only where the sale of a regulated investment is concerned. They may still be in a position to represent any mortgage lender and to sell the range of mortgage products available throughout the market as a whole. Once again they will be required to be registered under the Mortgage Code to be able to arrange mortgages.A Tied Agent is required, under the Financial Services Act 1986, to tell you, at the first available opportunity, which insurance company he/she represents and they will again be required to justify why they have sold a particular investment product. However, they will only have to make that selection from the products of the company they represent and they do not have to take into account products from other providers.

Unregulated Mortgage Brokers

The term unregulated refers to the fact that this category of broker is not able to sell regulated investment products that are covered by the Financial Services Act. However, this does not mean that you should avoid this type of broker. These brokers will again be required to be registered under the Mortgage Code and will specialise in offering mortgage advice rather than investment advice. The fact that these brokers specialise in mortgages rather than pensions and investments could mean that they have superior knowledge of the mortgage market.

Many of these brokers will have an arrangement with an Independent Financial Adviser so that if you have a requirement for advice in respect of regulated products then a referral can be made to the IFA.

Advantages and Disadvantages of using a Broker/Financial Adviser

The explanations above should have helped to clear up any confusion between the different types of adviser. Basically there are two kinds of advice that people may need when deciding on a mortgage. First you will need to decide what type of mortgage to take. This decision will require you to choose the most appropriate type of product for your needs and the most suitable lender. The second decision is what method of repayment to adopt and how best to approach the subject of life assurance and what investment product, if any, is required to repay the mortgage debt.

For the first part, if you have decided to use a broker, you will need to choose one who has an in depth knowledge of the mortgage market, the products available and good connections with a variety of lenders. However, for the second area of the decision making process you need access to someone who can give clear and straightforward advice on what types of insurance product and investment that will best suit your financial circumstances. Ideally you should look for a broker who can provide both of these services.

We should now look at the advantages and disadvantages of using an adviser;

Advantages

  • A good Mortgage Broker will deal with hundreds of mortgage applications each year and will have an in depth knowledge of the products available and the terms and conditions that apply to each one.
  • A Mortgage Broker will have developed relationships with a number of lenders over the years. This may mean that the lender will be more flexible in their approach to your application and if they see the application as borderline may approve it where it would otherwise have been declined.
  • The Mortgage Broker will negotiate with the lender on your behalf. He will know if the lender is taking a reasonable approach to your application, taking too long to process it or making unreasonable demands for information. He will also be able to explain the whole process to you in a straightforward manner and assist with the completion of application forms.
  • If your mortgage is declined by one lender then the broker may be able to replace the application with another lender with the minimum of fuss and bother.
  • Some brokers will have access to specialist deals that are not available to the public direct. These products can sometimes be particularly attractive as the broker can often use his 'buying power' to negotiate competitive rates with lenders.
  • The Broker may also be able to offer information and advice on the whole range of financial products and give advice on the most suitable repayment method for you personally. He may also be able to arrange life assurance and any other investment policies needed.

Disadvantages

  • A Broker will require remuneration in some form. This may mean that he will charge you an arrangement fee, take commission from the sale of any insurance or investment products or be paid by the lender. Always make sure that you are clear at the outset if there will be a charge to you personally and ask how he will be remunerated. If commission is being paid on the sale of an insurance or investment product he is required, by law, to divulge this to you and show you how much is being earned. Always remember that whatever commission is being earned is coming from your monthly premiums and in some cases you may be better off to pay a fee to the broker and ask him to waive his commission. This can then enhance the value of your investment. If the broker is earning an arrangement fee from the lender then he is also required to divulge the amount to you if it is above £250. This is a requirement in order to comply with The Mortgage Code.
    If your broker is charging you a fee then you should expect anything up to 1% of the mortgage amount. However, it is often possible to negotiate with the broker and it is always worth negotiating on the figure first quoted. If the broker is charging a fee then you could normally expect to offset that fee against any commissions received and again it is always worth asking. Always remember that this is a competitive market and obtain quotations from several brokers before deciding - you will probably find that the quotes will differ significantly.
  • You may lose some of the direct contact with the lender who is arranging your mortgage which could be a disadvantage if you prefer to deal with the product provider directly.
  • The Mortgage Broker may deal with only a small panel of lenders on a regular basis and so be tempted to recommend their products above other more suitable lenders.
  • Some lenders would rather deal directly with their customers rather than through brokers so your broker may not have access to some products. This will often apply to the new style of direct telephone lenders.

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