Smart Money: Top Ten Tips

Customers complained that they hadn't been advised properly and said the bank had failed to ensure their investments were suitable for them, a charge levelled at several banks in recent years. But how do you know if your bank is giving you unsuitable advice?

Paul Lothian, chartered financial planner at Verus Financial Planning in Dundee, shares his top tips on spotting and avoiding bad financial advice.

1 Independence

The advice given by "tied advisers" - those working for one financial institution - is not automatically bad, but independent financial advisers (IFAs) are able (indeed, are obliged to) recommend the most suitable solution from the whole of the market. Tied or multi-tied advisers simply cannot provide this service. Don't be fooled by any "we have chosen the best of breed" justification for a tied adviser's limited approach.

Only a tiny proportion of complaints received by the Financial Ombudsman Service are IFA-related. The vast majority emanate from other advice channels, particularly the high street banks.

2 Payment basis

If an adviser tells you his advice is free, turn and run away immediately. What he is actually saying is that some product manufacturer offers him an incentive to sell their products to you, normally via commission, which you will ultimately pay for via the product's charges.

Good IFAs will regard commission as belonging to their client and will agree a fee with you, which may be met by commission in cases where it is payable.

3 Qualifications

The current level of minimum qualifications required to give financial advice is woefully low. This has been recognised by the Financial Services Authority (FSA), which wants advisers to be qualified to diploma level by 2013. Most good advisers have already attained diploma-level qualifications. Ask the adviser about their professional qualifications and ask for sight of proof. Seek advice from an adviser with advanced qualifications; many such advisers will hold chartered financial planner status - the "gold standard" in financial planning qualifications.

4 Membership of a professional body

Most good advisers will tend to be members of either the Personal Finance Society, the Institute of Financial Planning or the Securities Institute. Membership requires adherence to a code of ethics and conduct, and the professional bodies check that their members' knowledge is kept up to date.Membership can be verified at www.findanadviser.org and www.financialplanning.org.uk

5 Investment philosophy

Does the adviser/firm state a clear and rational investment philosophy? What is the basis for their approach to investing your money? If they can't articulate this, then the chances are that they are selling funds and products rather than being investment professionals. Be suspicious of an adviser who recommends you disregard individual savings accounts (Isas) in favour of less tax-efficient products. While there are circumstances where not utilising the annual Isa allowance might be justified, such cases are rare.

6 Existing customer endorsement

Ask for client testimonials or letters of recommendation. Good advisory firms have satisfied customers who are generally willing advocates for the adviser/firm.

7 Beware of going 'off piste'

Extreme care should be taken when being recommended unregulated investment products and esoteric "alternative investments" such as forestry funds, agriculture funds and student accommodation funds. Most are complex, high-risk, expensive and potentially illiquid. Some advisers recommend such products because they tend to pay high rates of commission.

8 Understanding your needs

The FSA rightly requires advisers to demonstrate an understanding of a client's financial background and objectives as well as their attitude to risk and investment knowledge/experience. Good advisers will spend a lot of time in this area, poor ones treat this as a "box ticking" exercise. Beware of any adviser who starts talking about products or "solutions" before the in-depth fact-finding process has been completed.

9 Risk tolerance

A vital component of the fact-finding process is establishing an investor's attitude to or appetite for risk, as well as their capacity (financial and emotional) to deal with capital losses. This should be much more than being asked whether you are a "cautious, balanced or adventurous" investor, or being asked to pick a number between one and ten. As well as adopting comprehensive and robust risk profiling techniques, a good investment adviser will spend a considerable amount of time? discussing this area with you, to inform and ensure the suitability of his carefully considered recommendations.

10 Know what you Are getting into

Don't accept and act on an adviser's recommendation(s) unless and until you are comfortable that you understand the costs, risks and other salient features of the product(s) involved. And remember, if something sounds too good to be true, it probably is.

How to find the right advice