If you’re considering signing up for a financial product that involves any degree of Investment, from stocks and shares ISAs to pensions, then you’re going to need to speak to a good financial advisor.

But how do you measure ‘good?’ And what happens when things go wrong?

Once upon a time, I was fully qualified to give regulated financial advice – not that I could advise readers any more as my qualifications date back to the mid 2000’s! Even though I can explain how financial products work, my understanding of the latest products on the market isn’t nearly good enough to tell you what to buy. That’s why financial advisers are expected to keep on top of all the changes in the investment market. They also have to update their knowledge and follow a myriad of rules set by the regulator, the Financial Conduct Authority. But even then, things can and do go wrong.

Here’s my guide on how what you need to know – and what you can do when things go wrong.

What is regulated financial advice?

Traditionally, financial advice would involve visiting a specialist financial advisor in an office and being talked through your options. In return, you’d pay a fee (one-off or ongoing) and potentially commission too.

Things have changed quite a bit since those days. That’s because the financial advice sector often excluded people who wanted basic advice or didn’t have much money to invest. Concerns have also repeatedly raised about excessive commission and an overly complicated process that confused inexperienced investors.

If you’re looking to invest, then there are two options available to help you make a decisions: ‘guidance’ and ‘advice’.

Guidance is where businesses or organisations don’t tell you what investments you should purchase. Instead, they talk you through the various categories available and explain how things work in general terms. This guidance should be free in most cases and is often provided by official or Government-linked organisations, like MoneyHelper for example.

Advice is where a regulated investment specialist, like an Independent Financial Adviser (IFA), assesses what you want to get out of your investments and recommends a product or ‘basket’ of products based on your attitude to risk and what you want to get out of the investment strategy. This advice is tailored to your needs and must follow strict regulatory requirments before the final recommendations are given and agreed on.

Make sure you understand what advice it is that you’re paying for though. An IFA can give you advice about a range of financial products and services. A restricted (or tied) advisor only gives advice on a limited range of products or advises on behalf of specific businesses. The business should tell you if the advisers are independent or restricted.

Times Money Mentor has a range of articles and modules designed to help you if you’re considering investing.

What financial products are unregulated?

Just because a financial product involves an element of investment doesn’t mean it’s regulated. This doesn’t mean it’s illegal either. It just means that the product is considered outside of the current financial services regulations. It also means if something goes wrong you cannot go to the Financial Ombudsman Service (FOS) with a complaint.

So what’s not regulated? Well the biggie – and the one that I get asked about the most – is cryptocurrency. Crypto in all its forms is considered exceptionally risky. That’s because it’s relatively ‘illiquid’ which means if you want to cash in your crypto coins, it might not be easy to do it quickly, from contacting the crypto platform to processing the sale. Many people have lost huge amounts of money after certain crypto currencies collapsed because they couldn’t get their cash out in time to avoid the currency going under.

That’s why asking about ‘liquidity’ – how quickly you can get your money out of an investment if there are concerns about an platform or business – is vital.

Other unregulated products and activities include:

  • Landbanking (buying strips of land, often abroad, as an investment).
  • Precious metals (investing in gold, titanium and other minerals).
  • Product specific investments (investing in art, wine, collectables and more).
  • Unregulated collective Investment schemes (UCIS).

Collective investment schemes (CIS) are a regulated type of investment where a group of people pool their cash in to an investment fund that is run by a fund manager. This allows you to spread the risk of your investment with a number of people and potentially invest in more things. A UCIS is a riskier version that may incorporate unregulated investments based in other countries, or other riskier forms of investment. They are a high-risk product which means only experienced (and wealthy) investors who can afford to take the risk should be sold these schemes.

Many of these investments are sold through aggressive cold calling and often involve out-and-out fraud. Never sign up to an investment from a cold caller or through any other form of direct contact. This is illegal.

What can go wrong with investments and pensions?

It’s often said, but let’s reiterate it: investments, including your pension, can go down as well as up. The higher the level of risk, the greater the chance that you could lose all of your cash – as well as make the best returns. That’s why understanding what investment risk is and assessing your attitude to it is so important.

You’ll have heard the phrase ‘don’t put your eggs all in one basket’. That’s particularly important with investments. ‘Diversification’ is the official term for this practice. It basically means you should not rely too heavily on one product or type of investment. A diversified portfolio is a collective group of regulated investments, some with higher risk, some (like bonds or savings) with a lower risk profile. This means that some elements of your investments should generate bigger profits, but if it goes wrong, you’ve got a bit of back up with the safer, but lower yield investments.

If you’re planning on investing, do some research yourself. Don’t just rely on the advice from an advisor. You should take some time to mull over:

  • How much money you have to invest and how much you need to hold back for emergencies.
  • How quickly you can access the money invested if you need the cash – and how much you’ll pay in exit fees and lost interest or profits.
  • If you have any outstanding debts (pay these first).
  • How much money can you afford to lose.
  • How long you can afford to ‘lock away’ your money.

The last point is important because many investments are medium to long-term. That means they are designed to run for a long period of time, often over 20 years or more. Over these timescales, the ups and downs of the stock market should balance out and your investment should increase over time if it is managed well and is suitably diversified.

How do I complain about a financial adviser?

People often think there’s no point complaining about financial advisers, given the sheer volume of checks and assessments required by regulated businesses. But things can and do go wrong.

By far the most common complaint is about investments that were much riskier that people had anticipated. These complaints can and do get upheld by the Financial Ombudsman, so it’s important to explain what you understood when you were sold the investment, versus what happened.

Other common complaints include:

  • Mismanagement of funds.
  • Failure to act promptly to requests to change or sell investments.
  • Excessive fees or commission (either unclear charges or the size of payments versus the level of work done by the business).
  • Selling unregulated investments.
  • Not diversifying portfolios.
  • Loss of documents, calls and information relating to meetings and advice.

You can ask the business to provide you with documents covering to the sale and management of your investments as part of your complaint. If the business refuses or stalls, then you can request all information held on file by making a ‘subject access request’. Here’s a guide from the Information Commissioner’s Office (ICO)

When making a complaint, the most important thing is to explain in your own words what you understood when the incident occurred. With investment complaints, the more information you have the better. But you don’t need to use a solicitor or pay a third party to make the complaint.

Make sure you include:

  • What went wrong.
  • What you understood you versus what actually occurred.
  • A timeline of events (bullet points work best for this). Don’t worry if you don’t have exact dates.
  • What happened when you made your complaint.
  • What you want to sort things out.

What compensation can I ask for/expect?

Compensation isn’t just about cash. It’s also about sorting out the problem definitively. When you make your complaint, you should spell out the following:

  • What you want the business to do to sort out the error or mistake. If you’re not sure or it’s too complicated to say, ask them to ‘put you in the position you would have been in had the error not occurred’.
  • Compensation for financial loss. This could be the money that your investment lost, but will not include potential investment profits as these are almost never guaranteed.
  • Compensation for distress/inconvenience. This is known as a ‘gesture of goodwill’ and is a symbolic payment to reflect what you’ve been through. Don’t get too excited, in other words. Here’s the Financial Ombudsman guide to D&A payments.
  • Consequential loss. This is where you’ve lost money as a consequence of the situation or error. This can be hard to define. For example, if you’ve lost a house purchase because the business didn’t cash in your investments on time, then you aren’t going to get a free house. But you could get compensation for costs that you’ve incurred as a result of going through the house purchase process.

Some compensation scenarios are exceptionally complicated, or impossible to sort out. For example, if you’ve accidentally been taken out of a life insurance policy, then you are unlikely to be allowed back in to it. In these circumstances, compensation may be required to reflect getting you back in to a similar situation. Other disputes are even more complicated, like signing up to an annuity on the basis of a quote, then getting a lower monthly payment. Quotes aren’t usually guaranteed, but if there’s a major difference and you weren’t warned, you could argue you’ve been trapped in to a bad deal.

Can I take things further if I’m not happy?

Regulated financial advice is covered by the free Financial Ombudsman Service (FOS). The Ombudsman investigated just under 8,000 cases in 2022/23 and upheld around a third of all cases.

These cases are often hard fought, as they can involve huge sums of money. The Ombudsman can compel a business to pay up to a maximum of £430,000 (limits vary depending on when the complaint incident occurred). The Ombudsman can (and does) recommend businesses pay out higher amounts too, which you can attempt to enforce through the courts if the firm declines to pay over the maximum limit.

Featured in Times Money Mentor – Martyn James

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