What should I know about the different types of financial advisers?

Key takeaways

  • Terms used to describe those who give financial advice are not clearly defined and this can lead to confusion.
  • Generally, the term broker is used for a person who can sell you a product, while an adviser or a financial planner provides advice that may lead to the sale of a product.
  • The term financial planner is generally used to describe a professional who should provide you with a financial plan, covering all or most aspects of your financial life.
  • A tied adviser or agent typically recommends only, or mostly, products from the financial institution that employs them.
  • An independent adviser typically recommends products from a range of providers.
  • As the independence or lack of it is not always clear, the regulator is working on categorising advisers more clearly.

Financial adviser, financial planner, broker and tied adviser or agent are all terms you may come across when you consider getting financial advice.

What are the differences and what should you look for?

Know the lingo

The terms are used loosely and definitions differ, but generally the terms are used as follows:

Broker is used to describe a person who can sell you financial products such as life insurance, short-term insurance, investments and funeral products. Advisers who specialise in short-term insurance or medical schemes only, often refer to themselves as brokers, and are not able to advise you on a range of products and services.

Financial adviser is generally used to describe a person who does more than just sell you a product – they give you advice so that you get a financial product that is suitable for your needs.

Financial planner generally means a professional who gathers your financial and personal information and uses it to draft a financial plan, with recommendations dealing with all aspects of your financial life. Financial planners should be sufficiently skilled and experienced to consider a range of financial needs from life insurance to retirement planning and estate planning.

Although a financial planner may not deal with each aspect of your financial life themselves, they will identify the areas that should be addressed and the reasons why. If the work does not fall within their skillset or experience, they will refer you to another professional who, for example, specialises in medical schemes or short-term insurance.

Tied advisers

A tied adviser or tied agent is employed by or ‘’tied” to a particular financial institution or product supplier, such as a life insurer or a bank. They will typically recommend only, or mainly, that institution’s products.

Tied advisers may be salaried employees, or their earnings may be a combination of a salary and commission.

The commission is likely to be based on targets, which depend on the number of policies the adviser sells or the amount of money they recommend you invest in the insurer or bank’s products. The amount you invest is known as assets under management and may be invested on an investment platform in the financial institution’s group. The product provider is responsible for the advice provided by it’s employee.

Some insurers have set up franchises which tied agents work for, or own.

A tied agent who owns a franchise manages their own financial services business as a separate legal entity, but they receive support and services from the insurer.

A franchised advisory practice may be registered to give advice under its own financial services provider licence, or it may practice under the insurer’s licence.

Some larger financial services companies have their own financial advice businesses which employ advisers who are free to give advice on a range of products. These businesses are known as wealth management businesses, and may focus only on investments.

They are, however, likely to recommend you use the investment platform provided by a business within the group.

Independent financial advisers

Independent financial advisers work in financial advice businesses that operate on their own legal licences and make their own independent choices about the products they recommend to you. Their recommendations on products are not restricted to those from any financial institution.

However, this does not mean that an independent financial adviser will give you advice on every product available in the country. Typically, independent advisers do a due diligence on, and recommend, a selected range of products best suited to their ideal clients.

Independent advisers operating on their own licence are responsible for the advice they  give and are required to have professional indemnity insurance that can compensate you should you suffer a financial loss as a result of negligent or inappropriate advice.

They may recommend the use of one or a few investment platforms only.

As they are independent, these advisers sometimes have their own investment products – particularly their own unit trust funds.

Many independent advisers limit their investment advice to identifying your investment needs and the returns you require. They outsource the investment decisions on where and with whom to invest to a discretionary investment adviser. 

Discretionary investment advisers are investment professionals who focus on selecting and blending investment managers to create investment portfolios. These portfolios are designed to suit different types of investors and their investment needs.

More clarity coming

The financial services regulator, the Financial Sector Conduct Authority (FSCA), is trying to find a better way of categorising financial advisers so you can understand whether they are independent or employed by a financial institution. You should then know what advice you can expect from them.

The FSCA has stated that you should be able to clearly understand what services an adviser is providing and in what capacity they are acting.

As part of the Retail Distribution Review, the regulator has proposed two categories for advisers, based on the adviser’s relationship with suppliers of products.

The FSCA’s proposal is that advisers call themselves either:

  • A product supplier agent who is authorised to provide advice on the financial products of a specific financial services group (a product supplier); or

  • A registered financial adviser (RFA) who is authorised to provide advice on the financial products and services of a number of different product suppliers.

The regulator has also proposed only allowing advisers who have a professional designation that meets the requirements set by the Financial Planning Standards Board, to refer to themselves as financial planners.

Advisers who have obtained a post-graduate diploma in financial planning, belong to the Financial Planning Institute and can therefore use the Certified Financial Planner designation, would be among those able to call themselves financial planners.

Sources: Retail Distribution Review: Discussion Document on Categorisation of Financial Advisors and Related Matters