The demise of another independent financial adviser (IFA) struggling with mis-selling claims underlines how difficult it can be to protect yourself when seeking investment advice.
Berry Birch & Noble Financial Services (BBNFS) is the latest IFA to call in the liquidators after allegations that it mis-sold products including high-income "precipice" bonds. Two other IFAs, the David Aaron Partnership and RJ Temple, have also folded in the past 12 months.
In the case of BBNFS, investors waiting for mis-selling claims to be investigated by the company's liquidators could face months of delays. The Financial Services Compensation Scheme (FSCS) needs to decide whether BBNFS is "in default" before any compensation process can be triggered.
Luckily, most of BBNFS's former customers will be unaffected by the liquidation. Those who bought the odd unit trust or individual savings account through the IFA, for example, won't lose out as their money is invested with a separate fund manager - not with the IFA itself.
However, the case highlights the need to pick a reliable IFA, so that at the very least you will know its advice is sound. There are around 25,000 IFAs in the UK and, as in any other industry, they include the good, the bad and the ugly. A friend's recommendation is a good start, but that may still not be suitable for your needs. There is no easy way to compare IFAs, short of asking for a complex list of different prices depending on whether the adviser is working on commission or for a fee, or using a baffling mix of both.
This situation is in a state of flux as IFAs gear up for changes imposed by City regulator the Financial Services Authority (FSA). Under these, they will have to present potential clients with a charge sheet - or "menu" - that clearly outlines commission and fee payments. IFAs will also have to declare whether a financial product provider has a significant stake in their business.
These rules, known as "depolarisation", are unlikely to be in place until early 2005. And even once they are introduced, the industry will still be characterised by a hotchpotch of different businesses - from one-man bands to national outfits such as Hargreaves Lansdown. Some will be able to use their size to secure greater discounts for clients on products, and may have more specialists than others. Multi-tied advisers, working for several financial providers, will occupy a grey, quasi-independent area.
Mick McAteer, senior policy adviser at the Consumers' Association, says you should use your feet when searching for an IFA. "Go and see between three and six advisers and don't be afraid to ask questions. If you don't understand anything, it's the IFA's fault - not yours."
When you meet an IFA, ask if they have any outstanding mis-selling claims against them. You may think such a direct question is embarrassing, but you are making a decision that will affect your financial future. Be sure you know how your adviser is paid. Under the new polarisation rules, anyone describing themselves as "independent" will have to offer you the choice of paying for advice. This can be an hourly fee - typically £75 to £320 - or a pre-arranged fixed fee.
Most IFAs in the UK are commission-based, however. Research from IFA Promotion suggests that no more than 15 per cent of investors would be prepared to pay a fee for advice.
Whether you opt for fees, commission or even a mix will depend on your attitude to advice and your budget. Upfront charges may appear more expensive but should make you feel less pressured into buying a particular product.
If the worst happens and your IFA goes bust, the first rule is not to panic. Unless it's a case of fraud, remember that your money is not invested with the IFA itself but rather with the fund managers or insurers.
Even if your IFA managed your cash through a discretionary service, there should still be records outlining where it was invested. The liquidator will contact you in the first instance if you have a mis-selling claim. It will work out the IFA's remaining assets (if any), and if it determines there is not enough money available to pay all the creditors, your next port of call should be the FSCS. But should this body rule in your favour, be aware that any compensation is limited to £48,000.
While there are no cast-iron guarantees when it comes to financial advice, you can check the FSA website (www.fsa.gov.uk/register) to see if your chosen IFA is a registered practitioner before passing on your business.