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Due process

After receiving a substantial inheritance I approached my existing IFA for some advice on how to invest the money. I have used this adviser in the past for mortgage and life insurance advice but when it comes to investment advice I am less confident in their recommendations. Should I seek a second opinion?

You are right to think very carefully before making a decision about investing your money. Investing is never easy, even with the assistance of an adviser, so you must be completely comfortable with any recommendations before exposing your capital to risk.

Fortunately, it is relatively straightforward to identify potentially unsuitable investment advice by spending a couple of minutes looking at the advice process. The delivery of consistently excellent investment advice requires that your IFA follows a process with at least the following six steps.

First, ask yourself if they understood your financial objectives. Linking any investment recommendations to your wider objectives is an important first measure before useful advice can be given.

Unless your IFA understands the bigger picture, they cannot hope to provide advice relevant to your personal circumstances. How much time did your adviser spend discussing with you what you hope to achieve?

The second step in the investment advice process is understanding risk. It is your attitude towards risk, reward and volatility that will drive the suitability of any advice.

Because risk is so subjective, it is simply not good enough for an IFA to quickly categorise you as a cautious, balanced or adventurous investor. These categories are meaningless without something substantial to back them up.

As an absolute minimum, your IFA should be having a detailed discussion with you about your attitude towards investment risk. A more robust approach involves the use of a psychometric questionnaire to explore your views on different elements of the subject.

Step number three is strategic asset allocation. Academic studies tell us that it is the broad asset classes in which you invest that make the most difference to the success of your portfolio, rather than the individual funds or stocks selected.

Deciding on a strategic asset allocation model is therefore crucial to the long-term success of your investments. Ask your IFA how they have built your asset allocation model and what assumptions they have used.

Next, make tactical changes to the asset allocation model to reflect the view your IFA is taking on current economic and investment conditions.

They may also recommend changes to take any of your existing investments, such as property ownership, into account.

Ask your IFA how they make these tactical decisions. For example, find out if they have an in-house investment committee or if they outsource this function.

Step number five is fund selection. There are no right or wrong answers here, as long as your IFA has a robust process in place to ensure the selection of suitable funds.

They should be looking at a variety of factors to arrive at their recommendations and not simply relying on past performance figures or fund ratings.

Finally, the review strategy. Every investment should be reviewed at least annually to make sure it remains suitable. This is also a good opportunity to rebalance the asset allocation and find out if your attitude towards investment risk has changed over time.

Ask your adviser about their review service and how this is paid for. This question should quickly identify those who are interested in the initial product sale rather than an ongoing relationship.

An IFA who can deliver excellent investment advice will have this or a very similar process firmly in place within their business. They will have no problems articulating the various steps in their investment advice process, in plain English and without resorting to technical waffle.

Your IFA should also have no qualms about you seeking a second opinion from a fellow professional.

They should understand that this is a major financial decision for you to make which will have a lasting impact on your future financial prosperity.

Martin Bamford is a chartered financial planner at Informed Choice


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