Personal Finance: A Fool is wary of words to the wise

The fourth in our series of extracts from Motley Fool, the best- selling investment guide
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The Independent Online
The 'Motley Fool' started in the US as an investment newsletter and has developed into a $10m internet and publishing business. The heart of its philosophy is that we can all learn to run our own finances - and get better returns than the experts. The name comes from English court jesters whose role it was to question the king. Those who follow the Motley Fool's advice are Fools or Foolish investors

This week: be your own financial adviser

Where are you, a Fool, going to go for impartial, independent financial advice? Good question. There are two types of financial adviser: tied financial advisers and those who style themselves "independent". Tied financial advisers only sell for one company. When your bank phones up to ask if you'd like to see one of their advisers this is probably the type of person they mean. Avoid them as if your life depended on it. Which, in a way, it does.

The second type are the independent financial advisers, or IFAs. Independent by name, independent by nature? Not necessarily. IFAs work for themselves or as part of a larger operation. They have all had to pass financial exams and their activities are far more regulated than they ever were. However, there is one small fly in the ointment: your aspirations and theirs do not absolutely coincide. As long as this is the case it is hard to see how you can both move in the same direction. You wish to invest for your future in as profitable way as possible and incurring the smallest costs possible. They, on the other hand, have to make a living. They also have to make sure they don't "mis-advise" you, which means they are likely to keep more or less within the boundaries of financial wisdom and conservative investment planning.

When you buy an investment product from an IFA, a portion - sometimes a very,very significant portion - of the payments you make over the first couple of years and beyond will go into the pocket of the IFA.

There are significant differences between the sizes of commissions that the various types of investments pay IFAs, and it is a fact that those charging the highest commissions of all perform the worst. Ninety per cent of managed unit trusts - pooled investments in shares - underperform the average, and since they carry far higher charges than those that simply mimic the movement of the stock market, known as index trackers, they are far more likely to be recommended by IFAs. We suspect there is just a teensy bit of conflict of interest there.

Suppose you are an IFA. A client, Mr Alan Average, sits in front of you. You muse that there are two types of investment that might be equally suitable for him. One pays pitiful commission, the other a hefty whack over the first two years, followed by a healthy trailing commission over the next 20. They're both as good as each other, you think, so you sting him with the heavy commission. He won't be disadvantaged, and you have to make a living. Is this so wrong?

You can avoid this conflict of interest by visiting an IFA who works on an upfront, hourly-fee basis, or who undertakes to rebate a percentage of the commission received from any company whose investment he or she sells to you. There are good IFAs about and engaging one at this hourly rate is far more likely to avoid conflict of interest. If you phone 01179 769 444, you'll be put through to a register of fee-based advisers (including IFAs who work on commission or fees) and will get the numbers of six advisers practising in your area.

The effect, however, of regulation on advisers is to make them conservative and conformist, prepared to choose between the stale clutch of products on offer from the Wise (the people who run the financial services industry), but not prepared to step outside those narrow confines.

By offering the control of your finances to someone whose horizons are already limited, you are closing down the spectrum of your investment universe before you've even started. As a Fool, you are accountable to no one but yourself. That gives you independence of action and an invaluable edge. Take advantage of it. In short, get educated, get Foolish and be your own financial adviser.

Extracted from the 'Motley Fool UK Investment Guide' by David Berger with David and Tom Gardner, published by Boxtree at pounds 12.99. David Berger, David and Tom Gardner 1998. To order a copy with free postage call 0181- 324 5522.

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when not to invest

1. When you owe money. Harry's in debt. He's already lost a fortune at the bookies but he's got some acquaintances who've made a few bob on the stock market. The light dawns. Why not borrow more money, invest it in shares and pay off the debt? It's so simple.

If the year ahead is like 1993, when shares rose by 28 per cent, then it'll be drinks all round at the Dog and Duck. But if the market clocks in a year like 1973, when shares fell by 29 per cent, pounds 100,000 would be turned into pounds 71,000. Much worse was to come: 1974 brought a breathtaking 52 per cent decline, shrinking the pounds 71,000 to pounds 34,000. While these losses were painful for anyone investing their savings money, they were calamitous for debtors banking on making a quick profit. Betting against your debt is simply ludicrous and it doesn't make mathematical sense.

2. When you'll need to spend your savings. You have squirrelled away pounds 2,500 but if the money is needed for one reason or another, for instance to pay bills, you are not ready to get into shares. Buying shares with money you may need next June will have you pacing a moonlit living room floor. And the miracle of compounding takes time to work its magic. We don't think you should invest in shares any money you will need within the next four to five years. Leave it in a high-interest savings account.

3. When you don't yet know enough. You have to be sure you understand the nature of the stock market beast before you throw money at it. Stick outside the market and watch its daily antics for a while longer.