The middle way will win the day

Advice comes in all shapes and sizes, make sure what you get is what you wanted
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The Independent Online

It is a strange fact of life, that whereas people will ask searching questions of the salesperson when they buy a car or domestic appliance, when it comes to financial matters, they completely throw themselves at the mercy of a financial adviser. This is dangerous. It goes without saying that you should always know exactly what you are buying. To maximise advice, it is important to know how to handle the situation.

It is a strange fact of life, that whereas people will ask searching questions of the salesperson when they buy a car or domestic appliance, when it comes to financial matters, they completely throw themselves at the mercy of a financial adviser. This is dangerous. It goes without saying that you should always know exactly what you are buying. To maximise advice, it is important to know how to handle the situation.

Since the late 1980s, the financial services industry has been highly regulated. Advisers must undergo formal training and pass professional examinations. They must be supervised until they are deemed competent. Training continues throughout their careers.

So, where do you go for advice? There are two basic sources: first, your bank, building society or agent of a financial service provider; second, an independent financial adviser (IFA). Most banks and building societies will recommend the products that are considered most suitable for you from their own range, or from that of a particular provider. IFAs will recommend what they consider best for you from all the products available. If you know what you want, you could approach the provider of the desired product yourself.

Many private investors prefer guidance. A complete financial review will take a couple of hours. This is because the adviser will need a comprehensive picture of your present position.

Not everyone wants "the full works". Whether you want a full review or specific advice, the adviser will want to know your attitude towards risk.

Some people adopt a cavalier attitude and are prepared to take a high degree of risk in return for potentially greater returns. Most of us steer a middle course, adopting a cautious attitude and looking for some exposure to the stockmarket for longer-term returns.

A favourite ploy of financial advisers who recommend only their own company's products is to show the past performance of the fund. Remember, past performance is no guarantee of the future. Ask to see the performance over various timescales. If these show disparity, ask why.

Performance tables are published in financial magazines such as Money Management and on websites such as Standard & Poor's Micropal at www.micropal.com. A quick look here could steer you away from a dodgy investment.

It is important to listen carefully to everything that is said and reading everything you are given. It is essential that you understand the risks associated with specific investments, particularly so when high returns are forecast. You must see the pros and the cons.

Do not concentrate on the high income, but ask about the risk. This sounds obvious, but sadly many people overlook this aspect. For example, some fixed-term products have a good pre-set income that is far higher than a savings account.But the return of the capital can depend upon the performance of the stockmarket. If after five-years the FTSE 100 Index is lower than at the beginning, then not all the original capital will be returned.

Some investments are long-term by nature. They are stockmarket-related investments such as unit trusts. The minimum recommended investment period is five years. This is to cover fluctuations in the market and the costs of buying and selling the investment.

But the funds can be realised at any time. People who latch on only to this aspect, allow the intended long-term nature of the investment to evaporate. This can be costly.

Some investments are for fixed periods. Cash these in early and the investor will lose-out. With a standard fixed-term deposit account a fee will be payable. But with certain products the investor can lose-out significantly. For example, a bond that tracks the FTSE 100 Index over a five-year period could have a safety net resulting in the investor not losing any capital if the Index is lower at the end of the period compared to the start. But cash the bond in early and in certain cases only half of the original capital will be returned.

The moral is simple: never make a fixed or long-term investment if you might need the money in the short to medium term. No one should considera stockmarket investment unless they have a comfort level of cash savings. Three months income should be the minimum level of comfort.

Despite the regulatory system, investors should pay attention to financial advice. After all, the existence of the Highway Code does not remove the need to look before crossing.

Some Golden Rules:

Ask questions and if you want time to think about the advice offered, say so

If shown past performance figures, ask to see data for ta variety of timescales from 10 to two years

If you are not entirely comfortable, consider obtaining another opinion elsewhere

Think twice about any investment that has a free gift inducement

Finally, remember it is your future and your money, so do not be bamboozled

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