What does a financial advisor even do?

Mostly, we’re here for you to call in a panic when the news says something about a stock market crashing. We’ll try to talk you down off the ledge. Sometimes we succeed.

But seriously.

There are (currently – some regulatory regime changes are in the works) two kinds of advisors who need to be individually registered: AFA and RFA. There’s also QFE, in which the organisation gets QFE status, and then that confers some privileges and some restrictions on some employees of the organisation. The said employees do not need to be individually registered or anything like that.

I’ll list some legal definitions of the different adviser types shortly. The practical definition is, if you know you need a particular thing in Cat 2 (see list below), you can get an RFA to compare providers and advise on exactly how much of it you need. If you need a particular thing in Cat 1 (see list below), or you don’t know what you need and would like someone to help you figure it out, get an AFA. The providers of the assorted things are normally QFEs and their people should be able to advise you on their products, but it’s a rare QFE advisor who is even allowed to talk about any other organisation’s stuff. This limits their usefulness a bit in the planning stage, though it can certainly come in handy when you get down to nuts and bolts.

RFAs are allowed to advise on Category 2 investment products, which are as follows:

a) a bank term deposit;
b) a bonus bond;
c) a call building society share;
d) a call credit union share;
e) a call debt security;
f) a share in a co-operative company (as defined in section 2(1) of the Co-operative Companies Act 1996);
g) a unit in a cash or term portfolio investment entity (as defined in the regulations);
h) a consumer credit contract within the meaning of the Credit Contracts and Consumer Finance Act 2003;
i) a contract of insurance (other than an investment-linked contract of insurance);
j) a life insurance policy (within the meaning of section 2(1) of the Securities Act 1978) issued before 1 January 2009;
k) any other product specified by the regulations; or
l) a renewal or variation of the terms or conditions of any existing category 2 product.

AFAs are allowed to advise on the same, plus Category 1 investment products as follows:

a) a FMCA financial product (other than a product that is a category 2 product); or
b) a DIMS facility (other than a facility that is a category 2 product); or
c) an investment-linked contract of insurance; or
d) any other product specified as a category 1 product by regulation; or
e) a renewal or variation of the terms or conditions of an existing category 1 product.

In addition AFAs are allowed to do financial planning, investment planning etc. which is defined as follows:

To design, or offer to design, a plan for an individual that—
i. is based on, or purports to be based on, an analysis of the individual’s current and future overall financial situation (which must include his or her investment needs) and identification of the individual’s investment goals; and
ii. includes 1 or more recommendations or opinions on how to realise those goals (or 1 or more of them).
A service may be an investment planning service regardless of whether the analysis and identification is:
• of the individual’s particular financial situation and goals, or
• of the financial situations and goals attributable to the class of persons that the individual is identified as coming within.

An investment planning service can only be provided by an AFA (provided the AFA’s terms and conditions of authorisation permit them to provide such a service).

On the topic of fees:

The most common RFAs you’re likely to meet are mortgage brokers and insurance brokers, both of which are paid on commission. You generally pay nothing (usually; there’s a bit of complexity around unusual mortgages and some firms will have other contingency fees).

For an AFA who is managing your investments, I’d expect to pay 0.3-0.7% AUM (depending on total AUM; sometimes negotiable) plus whatever the management fees are on your funds, which you’d’ve been paying anyway. If your AUM is below a certain number – and this includes clients who want to get professional advice but DIY the execution – they’ll either decline entirely or want a top-up to bring it in line with what they charge their minimum networth clients. I occasionally see AUA, which includes fees on assets they aren’t managing as well – this is a lot rarer for obvious reasons and I’d expect to pay a lower AUA than AUM for the same level of service, but isn’t a dealbreaker. Besides this, you can expect to pay a flat fee for making the investment plan to begin with.

Hopefully that’s cleared some of it up for you!

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