FAQs - Financial Advice

 

Financial advice generally covers three main areas -

  • protection needs, such as life insurance;
  • regular or long term savings;
  • and lump sum investments; retirement.

Once a financial adviser has learnt about your personal circumstances and risk profile and has made his recommendations to you, you must consider the recommendations and decide if you wish to purchase the recommended products. The decision is yours, so it is important to understand the reasons why the adviser made his specific recommendations. If you decide to purchase a product, the payment should be made direct to the product provider and not to the financial adviser as they are not permitted to hold your money. Your financial adviser will expect to be paid for the services he provides which may be in the form of -

i) a fee paid by you which is agreed in advance;
ii) commission paid by the product provider from the money you invest or spend on the financial product; or
iii) a combination of a fee and commission.
 

Many products have a defined time period. If you purchase a product and later change your mind and cancel it, unless there is a cooling off period and that period has not elapsed, you may lose some or all of the money paid.

There are other types of licenceholders that are not financial advisers and which, having learnt about your investment parameters and risk profile, can invest and manage your money on a discretionary basis. Discretionary management means that the licenceholder will make the decisions for you, but according to your established preferences. Discretionary managers will be in control of your money and your investments and you should be aware that the value of investments can go down as well as up. Generally, they will not address any protection needs you may have. Discretionary managers are usually paid a percentage of the monies under management.

There are a number of reasons why you may need financial advice which will depend on your personal circumstances. Financial information and guidance is available on websites and in print but you can obtain a personal assessment and receive advice from a financial adviser. This may be useful where you may not fully understand the information available or want to ask questions.

Examples of why you may need financial advice include –

  • taking out a mortgage*;
  • starting to save for a pension or wanting assistance in converting your pension fund into retirement income;
  • protecting your family in the event of a serious illness or death;
  • investing a lump sum of money – perhaps from an inheritance;
  • or reviewing your existing policies.

* advising on and arranging a mortgage is not an activity regulated by the Isle of Man Financial Services Authority ("the Authority"). However, if an interest-only mortgage (or “endowment mortgage”) is arranged (as opposed to a repayment mortgage), advising on or arranging an endowment or other investment policy, which will become the payment instrument of the interest-only mortgage, does fall within the remit of the Authority.

You should always make sure that you have sufficient funds accessible at short notice to meet day to day expenses and also have an emergency fund for unexpected expenses before considering purchasing any financial products.

You can find a list of financial advisers in the telephone directory. If the company has a boxed advertisement, it should state "Licensed by the Isle of Man Financial Services Authority". If the company just has a linage listing, it is worthwhile clicking this link to see if they are licensed by us.

The list contains all investment business licenceholders not just financial advisers but you should find the name of the financial adviser you have selected. If the website does not include the company you have chosen then it is not regulated by the Authority and you should not use it.

Financial advisers may offer different services –

  • full advice means they will advise on, or arrange deals in, a full range of products offered by a range of different product providers;
  • restricted advice means they are only ABLE to advise you on a restricted range of products;
  • limited advice means they will only advise you on a limited range of products, (for example, only pensions) at your specific request; and
  • execution only means they will not offer you ANY advice, but are purely carrying out your specific instructions (for example, to sell some shares). Execution only may be in respect of one transaction, a series of transactions, or all your dealings with that adviser – you must agree this with the financial adviser.

Tied agents may offer any of the above services, but will only advise on products provided by their group of companies (for example the products from one bank/ insurance company). In contrast, independent financial advisers (IFAs) are not tied to any one specific product provider.

Ensure you understand what service your financial adviser is providing. If you are receiving any service other than full advice, the financial adviser must confirm this to you in writing, pointing out the consequent reduction in investor protection.

If you want full advice, the financial adviser should have considered products from at least six different product providers and be able to explain to you why they have selected one product instead of the others. The more product providers that the adviser deals with, the greater your access to different products, which ultimately gives you more choice.

There are different ways to pay for the advice you receive –

  • you may have to pay a fee for the advice you are given;
  • the financial adviser may be paid commission from the money you invest or spend on the financial product; or
  • there may be a combination of a fee and commission.

There may also be additional costs if the financial adviser provides on ongoing review service.

The financial adviser must provide you with a Terms of Business which, amongst other things, will provide information relating to his costs and how he is paid. Any fees must be agreed in advance of any advice or the arrangement of a transaction. Where the financial adviser is receiving commission, he must tell you and you have the right to ask how much this will be.

Depending on the size of the investment, the financial adviser may be able to offer you more favourable terms on larger amounts. If you are unsure whether this may apply to you, ask your adviser.

If your financial adviser was to be remunerated from the money you invest or spend on a financial product and you do not invest in or purchase a product, the financial adviser may require you to pay a fee. This should have been made clear to you in the Terms of Business but do ask the financial adviser about this possibility.

Although it may be possible for you to see a financial adviser without an appointment, it is better if you do arrange one to ensure that –

  • the financial adviser has sufficient time to obtain all of the information needed to advise you appropriately;
  • you have sufficient time to get together details of any existing products or policies you have so that you can give all relevant information to the financial adviser; and
  • you will have had an opportunity to check that the financial adviser can offer advice on the type of product you are interested in or provide advice on the particular financial needs that you have.

Prepare for your meeting by being clear about your financial goals and gather together details of any existing products or policies you have so that you can give all relevant information to the financial adviser. You may find it helpful to think about what you want to achieve, i.e. borrow to buy a home or save for your retirement or something special.

If you want to save or invest, you also need to think about how you feel about risk –

  • is it important that you don’t risk losing any of the money you put in?
  • are you willing and able to accept some risk of possible loss if it means you may get a bigger return?

If you are willing to take some risk, think about how much. The financial adviser will look to match your risk profile to a suitable product(s). However, as a general rule, if something seems too good to be true, it probably is! There is no such thing as a risk-free investment.

Familiarise yourself with the concept of 'diversification'. This means investing in a variety of products or asset classes to help reduce risk - it reflects the proverb "never put all your eggs in one basket". Ask your financial adviser about diversification and how you can use this concept in your investments.

Think about whether you just want to buy a specific product or if you want an ongoing service from the adviser.

When you meet the adviser you will be asked questions about –

- your income and savings;
- any borrowings or debt you have;
- how you would cope with an unexpected event such as not being able to work;
- your partner, children or other dependents;
- your employment status, how much you earn;
- any financial products you already have;
- your risk profile.
 

Be prepared to answer these questions – take any product documentation you have with you. The financial adviser cannot advise you properly without this information. You will also have to take Know Your Customer documentation with you which should include either your passport or driving licence which confirms your identity and an original utility bill from the last 3 months which will confirm your address.

If you are not prepared to answer all of the questions, the financial adviser may be prepared to offer limited advice based on the information you do provide. Under the limited advice option, the financial adviser is not able to assess whether the product being recommended is truly suitable for you and, in the event that you are dissatisfied with the product, you will have fewer grounds for complaint than someone who provided all necessary information to the financial adviser.

Another alternative is the execution only basis. However, this means that the adviser does not advise you at all and will not comment on whether the product is suitable or not – you need to have requested to buy a specific product and you will have very little protection.

You may wish to ask how the information you provide will be used – for example whether it may be used for marketing purposes. Make sure you are satisfied with the response. You may also want to ask about the financial adviser’s data protection policy.

The financial adviser will provide you with a business card containing his contact details and a Terms of Business. The Terms of Business will set out the basis on which the financial adviser will provide services to you and will also include information relating to fees and commissions and what type of adviser the company is (independent or tied). Both the business card and the Terms of Business should confirm that the company is regulated by the Financial Supervision Commission.

The financial adviser will ask you a number of questions about your personal circumstances such as –

- your income and savings;
- any borrowings or debt you have;
- how you would cope with an unexpected event such as not being able to work;
- your partner, children or other dependents;
- your employment status, how much you earn;
- any financial products you already have;

The financial adviser will also ask about your attitude to risk. This means asking you about how you feel about –

  • whether it is important that you don’t risk losing any of the money you invest; or
  • whether you are willing and able to accept some risk of possible loss if it means you may get a bigger return?

If you are willing to take some risk, the adviser will discuss with you exactly how much risk you are prepared to take. This is so that the financial adviser will be able to match your risk profile to a suitable product.

Your age may impact on your tolerance of risk, as the older you are, the less opportunity there is to recover from poor investment choices. So make sure that you understand the risks associated with your chosen investment.

The financial adviser will also need to know the timeframe for any investment. Some products have a specific life, for example, 5, 10 or 25 years. In order to ensure that you will be able to afford to pay the premiums for these products, their maturity date should not extend beyond your retirement date.

Be sure that you can afford to tie up your savings for the period of the product. Be clear about whether you will be able to access your funds if necessary and whether any charges or penalties will apply to withdrawals.

The financial adviser will seek to ensure that you have sufficient funds to meet day to day expenses and also have an emergency fund for unexpected expenses before recommending any products to you.

Prior to making any investment recommendations your financial adviser will ensure that any protection needs such as life assurance are addressed.

This information will be summarised on a fact find form which you will be asked to read, confirm that the details recorded on the form are correct and then sign the form. You will also be given a copy of this form for your records.

Having obtained all of the necessary information, the financial adviser will consider your financial circumstances and your risk profile and prepare recommendations to meet your needs. These recommendations will be in the form of a Reasons Why letter or report. This may be posted to you so that you can consider this at your leisure. Alternatively, a second meeting may be arranged so that the financial adviser can go through the letter or report with you.

You should take the following documentation with you to the meeting –

  • any documentation relating to existing products you have;
  • bank statements, credit card statements and details of other loans;
  • Know Your Customer documentation which should include either your passport or driving licence which confirms your identity and an original utility bill from the last 3 months which will confirm your address.

If you wish, you may take a family member or friend with you but bear in mind that you will be asked some personal questions and also questions about your finances. Make sure that you are happy that your answers will be heard by the person who accompanies you.

If you are not a regular and highly experienced investor it is a good idea to take someone with you to help you understand what is being discussed. This is particularly important if you are incapacitated or vulnerable in any way.

Many of the questions that the financial adviser asks may seem personal, or be about financial matters that you are not comfortable discussing with someone who could be a complete stranger. However, in order to provide you with the best possible, most suitable advice, it is important that these details are provided. The financial adviser needs to ascertain what your current financial position is, what your needs are, what you can afford, etc in order to make the most suitable recommendations to you. In some cases, the advice may be that, although some needs have been identified, you cannot afford to address these now. Alternatively, you may have sought advice on your perceived need but, from the information given, the financial adviser may identify a more pressing need that you had not considered.

It is important that you understand what is happening at the meeting and also what is contained in the Reasons Why letter or report. The financial adviser is there to help you. If you don’t understand (and don’t tell the adviser this) then it will be difficult for you to make an informed decision on what to do. You should not be embarrassed by saying you don’t understand. The financial adviser has studied financial planning, taken examinations and has experience and expertise in providing financial advice over a number of years. It is understandable and accepted that you will not have the same level of knowledge.

After the meeting, the financial adviser, having obtained all of the necessary information, will consider your circumstances and prepare recommendations to meet your needs. Your will then be sent a letter which will outline your objectives, the service to be provided in order to meet those objectives and the cost of the service. The letter should clearly set out the commitment undertaken by both parties in terms of service and cost for each stage of the process.

You and the adviser must both sign this document to confirm your objectives and the service to be provided before proceeding to the next stage. By signing this document you are also agreeing to pay the fee for the adviser’s time in considering your circumstances, conducting research and preparing a Reasons Why letter or report.

Recommendations will be provided to you in the form of a Reasons Why letter or report. This may be posted to you so that you can consider this at your leisure. Alternatively, a second meeting may be arranged so that the financial adviser can go through the letter or report with you.

In addition to the Reasons Why letter or report, you should also receive product literature, illustrations and key features documents where available for the recommended products. These documents provide additional information about the products and may also provide examples of projected profits based on various interest rate scenarios. Although they may seem technical, it is important that you read these, and it is especially important to focus on the risks of the product as well as its benefits. If you have any questions on the content or do not understand any part, make a note to ask your financial adviser to explain these to you.

Some collective investment schemes require confirmation that the investor is an ‘experienced investor’. An ‘experienced Investor’ is a person who is sufficiently experienced to understand the risks associated with an investment in that particular scheme or fund. Do not invest in these schemes unless you really are an ‘experienced investor’ and understand the associated risks.

Only once you have received the Reasons Why letter or report and fully understood the recommendations, and have had time to consider whether these are appropriate for you, should you request the financial adviser to arrange the transactions. Some products have a cooling off period which enables you change your mind and cancel without penalty. However, you should be sure that you are happy with the products before you enter into any arrangements.

It is possible that you could be advised to surrender a policy or switch from an existing investment to a different product. If this is the case, the adviser should explain clearly in the Reasons Why letter or report, the advantages and disadvantages of this advice as these actions often incur additional risk, cost and loss of money.

There are other specialist areas of advice, such as gearing and pension transfers, which will be the subject of a separate FAQ.

At this stage, if there is a fee payable, you will be asked to pay it. If the financial adviser is being remunerated by commission from the product provider, you may ask how much this is. Depending on the size of the investment, the financial adviser may be able to offer you more favourable terms. If you are unsure whether this may apply to you, ask.

If your financial adviser was to be remunerated from the money you invest or spend on a financial product and you do not invest in or purchase a product, the financial adviser may require you to pay a fee. This should have been made clear to you in the Terms of Business but do ask the financial adviser about this possibility.

Be prepared to ask the financial adviser the basis on which they make any recommendations. Ask if they have a ‘product panel’ (a list of products which they have already assessed as the best performing in their field). Ask how they review and monitor the investment products that are recommended. Also ask how you can be sure that you are getting the best possible advice.

The Authority has issued guidance about its role in relation to complaints and what an investor should do if they are unhappy with the advice they have received or the product they have purchased. The Authority will only investigate a complaint if it gives rise to material regulatory issues. However, there is a Financial Services Ombudsman Scheme which may be able to assist you.

The guidance can be accessed by the following this link

Remember that the value of your investments can go down as well as up. Complaints about the lack of or poor performance of any investments are not regulatory issues.

business card

The business card should identify the financial adviser and the licenceholder that they represent, provide contact information in writing and state in a prominent position that the licenceholder is licensed by the Commission / Authority.

cooling off period

A cooling off period is a period of time after a purchase during which the purchaser has the right to cancel a contract without penalty but not without potential loss to capital value. Not all products have a cooling off period – do not rely on this when deciding whether to buy a product or not.

disposable income

Disposable income is the amount of money you have left over after all your expenses have been paid.

engagement letter

An Engagement letter is what you would receive from a fee based adviser setting out what your objectives are and what the firm of advisers is prepared to do in order to satisfy those objectives. It clearly sets out the commitment undertaken by both parties in terms of service and cost and unbundles each stage of the process and is signed by both parties as an agreement to proceed to the stage where research and production of a Reason’s Why Letter is undertaken.

execution only

Execution only means a transaction arranged in such circumstances that the financial adviser can reasonably assume that you are not relying upon the financial adviser to advise you on the merits of or the suitability for you of that transaction, for example, you do not provide any personal information but instruct the financial adviser to purchase a specific product, requested by you without any advice and in your name.

fact find

A fact find is a form which financial advisers use to document your answers to the questions asked about your personal circumstances and your attitude to risk. After collating your responses, the financial adviser will ask you to read through the form, correct any misunderstandings or errors and then sign the form as an accurate account of your personal circumstances. You will also be provided with a copy of the form which you should keep for your records.

illustration

An illustration is a way of showing how an investment may perform over a period of time, depending on the investment values it experiences over the life of the policy. It will also provide details of what will happen if you surrender the policy early. It is important that you read this document to ensure that the product is what you want. If you have any questions on the content, ask the financial adviser to explain it to you.

independent

Independent means that the financial adviser will review the products of a number of product providers to ensure that the most suitable product is recommended. To demonstrate independence, a financial adviser must have at least six product providers but the total may vary from adviser to adviser. The more product providers a financial adviser has access to, the greater the access to different products available in the market which will ultimately give you more choice.

investment

An investment is defined by the Regulated Activities Order 2009, but includes various long-term insurance products such as life insurance, pensions, annuities, and permanent health insurance as well as collective investment schemes, etc.

investment parameters

Investment parameters define what types of investment you are happy to invest in. The will cover the time period over which you want to invest and detail any restrictions on the type of investment (for example, you might stipulate that you want no investments related to the tobacco industry, or that you only want to invest in ethical investments, etc.).

key features

A key features document must include enough information about the nature and complexity of the product, how it works, any limitations or minimum standards that apply and the material benefits and risks of buying or investing for you to be able to make an informed decision about whether to proceed. It is important that you read this document to ensure that the product is what you want. If you have any questions on the content, ask the financial adviser to explain it to you.

know Your Customer

All financial institutions are required to "know their customer" and part of this is to obtain certain documentation in order to confirm that you are who you say you are. You will need to show your passport or driver’s licence (which has a photograph of you) and also you will need to provide a recent original (within 3 months) electricity, gas or telephone (not a mobile telephone) bill to confirm your address.

limited advice

Limited advice may be given if you are not prepared to answer all of the questions asked by the financial adviser. Any recommendation will be provided based only on the information you do provide. You must be aware that, in these circumstances, the financial adviser will be unable to assess whether the product being recommended is truly suitable for you. In the event that you are dissatisfied with the product, you will have fewer grounds for complaint than someone who provided all necessary information to the financial adviser.

product literature

Product literature is any documentation supplied by the product provider which provides an explanation of the product. It is important that you read these documents to ensure that the product is what you want. If you have any questions on the content, ask the financial adviser to explain it to you.

reasons Why

The Reasons Why letter or report must be tailored to your personal situation, be in plain English and include –

a) a summary of your financial position (based on the information you have provided);

b) a balanced rationale for the recommendations made, including details of the recommended products’ characteristics and risks, and why these products are suitable for you;

c) product literature or illustrations where available;

d) details as to whether each product has a cooling off period and where there is no cooling off period, a statement informing you of the risk of losing a substantial amount of your investment should you change your mind and decide, after starting the investment, not to continue with it;

e) a cost benefit analysis of any switches or surrenders, or gearing and why these are in your best interest; and

f) whether an annual review will or will not be undertaken on the investments.

It is important that you read this document to ensure that the recommendations meet your requirements. If you have any questions on the content, ask the financial adviser to explain it to you.

restricted

Financial advisers may have certain restrictions on their licence which prevents the financial adviser from advising on certain types of products. Details of any restrictions can be found on the Authority’s website by searching the licenceholders’ register, selecting your financial adviser and clicking on "Licence Conditions".

riisk profile

Your risk profile will identify how much risk you are prepared to take in relation to investments. The higher the risk profile, the higher the potential for gain and, more importantly, loss. Therefore if you cannot afford to lose any of your money, you should not adopt a high or even medium risk profile. Your risk profile would be low.

switches/surrenders

Switching may involve moving from one type of fund to another (i.e. with profits to a balanced portfolio). This may incur some cost but be to your advantage in the longer term. Surrendering involves the cancellation of a product prior to maturity which may significantly reduce the amount you receive.

terms of Business

A Terms of Business must set out the basis on which the financial adviser is to provide its services; provide information on all relevant facts relating to the financial adviser’s fees and payment relating to the services provided; and state that the financial adviser is regulated by the Authority in the conduct of regulated activities.

A Terms of Business must also state that -

(a) you may request details of the amount of remuneration being received by the financial adviser;

(b) you have the right to request details of any relevant educational and professional qualifications, and the experience and track record, of the financial adviser and any employee of the financial adviser directly engaged in providing services to you;

(c) the financial adviser will not advise you to use the services of another person who is an associate of the financial adviser without disclosing that relationship;

(d) where the financial adviser is a tied agent of an institution, that relationship is disclosed.

tied or tied agents

Being "tied" or acting as a "tied agent" means that the financial adviser can only sell the products of the company or group of which the financial adviser is a part.