Financial Broker

What is a Financial Broker?

A Financial Broker is expert on money matters relating to individuals and companies. Their services will include some or all of the following: personal financial planning, life cover, serious illness cover, income insurance, health insurance, savings, investments, pensions, retirement planning, business financial planning, inheritance tax planning, mortgages and commercial finance. They are different from Insurance Brokers whose services include house insurance, car insurance, commercial insurance etc. but some Brokerages are both Insurance and Financial Brokers.

What can I expect from a Financial Broker?

As a first step, a Financial Broker will take time to get to know you, your personal circumstances and your financial goals. They will discuss your available options and help you to crystallise these options into a financial plan. They will then research the products that match your needs from the range of companies they deal with. Brokers will offer a “fair analysis” of the relevant sector or market. This means they will generally research a majority of the product providers in that sector, at a minimum, when advising on your needs. In relation to life and pension products, there are eight life companies active in the Irish market. Financial Brokers will generally deal with at least five of these eight companies and many deal with all eight. So you get market wide advice from one source.

What are the benefits of dealing with a Financial Broker?

(1) A more Competitive Market: The Competition Authority found that demand for insurance was more price sensitive in the Broker market than through direct channels. With 1200 Financial Brokers in Ireland, the eight domestic life companies are much more competitive with regard to price, product design, investment performance and service than would be the case if they dealt with advisers who are tied only to them. This is because the life companies are subject to the scrutiny of external experts (Financial Brokers) who can easily switch the companies to whom they give new business. So before an individual Financial Broker even sets out to work for you, the existence of such Brokers means you will get a better deal from life companies and other financial providers.

(2) Financial Plans and Strategy. Financial planning starts with assessing your financial goals and living standard needs – both now and in the future. Your Financial Broker will analyse the resources available to you to meet these goals and needs (assets, liabilities, income and expenditure) and the major financial risks you are exposed to. Issues are identified and, in discussion with you, your Financial Broker will develop a strategy to mitigate risks and make maximum use of your money over time. This gives you greater financial clarity in relation to your current position and greater financial security about the future. You will have a clear financial strategy to achieve the things important to you in your life.

(3) Key financial goals: Some of the typical financial goals Financial Brokers assist clients with are: protecting the living standard of your family in the event of your death or your spouse’s death; protecting your living standard against illness or accidents preventing you from working; saving for your children’s education and other goals; saving for your retirement; investing lumps sums appropriately to get the best return consistent with the risk you will tolerate; setting up a plan to achieve financial independence (where you can live from your assets without the need for employment income). Your Financial Broker will conduct a “factfind” to get to know you and your requirements and develop a strategy to deal with your financial goals in the priority you set.

(4) Matching strategy with your risk tolerance. Your Financial Broker provides a service tailored to your specific circumstances. Your attitude to risk is of fundamental importance when making forward looking financial decisions. Your Financial Broker will work with you to establish your risk tolerance. This may take the form of specific risk analysis exercises and may also be established from the broader context of your interaction. Your Broker’s experience will be of great reassurance to you in ensuring that you adopt an appropriate strategy for your particular circumstances.

(5) Making the best choice for you. Your Financial Broker will assist in finding a product that fits your needs. Every case is different. Your age and stage in life, your current circumstances and your future plans will all effect what will work best for you. Your Financial Broker is experienced in guiding their clients through this sometimes complicated process.

(6) Price. Your Financial Broker operates on a fair comparison basis. When there are multiple products that match your requirements they will look to the market and find you the lowest cost option. Planning for your future is not always a case of finding the lowest priced option but when there are several suitable alternatives it’s good to know that you are dealing with someone who can take a broad view of the market on your behalf.

Example of savings:
Husband and wife 43 next birthday, both non smokers, €200K dual life, 20 year convertible term.
Cheapest quote - €52.84 per month.
Average of all other quotes - €66.52 per month.
Savings over the term €3,283 (25% of premiums paid).

Source: Best Advice comparison quote 1/5/12.

(7) Investment performance. Future performance is not something that can be accurately predicted. However, Financial Brokers have the skills, training and experience to guide you in selecting an investment appropriate to your needs. There are many factors that affect investment results. Your Financial Broker will advise and assist you in developing a well researched and structured investment that is compatible with your risk tolerance and is designed to achieve your goals and expectations over the medium to long term.

Consider the following examples (figures are gross of taxes, 1% RIY allowed for product charges):
Fund after 10 years
€50,000 invested achieving 6% p.a. returns €81,444
€50,000 invested achieving 5% p.a. returns €74,012

The difference is €7,432 from 1% extra investment returns per year. This is an extra 15% of the original investment of €50,000 and reflects the power of compounding.

Pension saving €300 per month 30 years increasing 3% per year:

Retirement fund 6% p.a. returns €354,144
Retirement fund 5% p.a. returns €304,026

The difference is €50,118 from 1% extra returns- again reflecting the power of compounding over a long term.

Financial Brokers cannot predict future investment returns but they can help you select a fund that will be expected to give you a good return consistent with your risk tolerance. They can also review available funds and brief you on the track record of the investment manager. They can also keep your portfolio reviewed to ensure it performs according to expectations and remains consistent with your needs. Your Financial Broker is also on hand to advise you when financial markets suffer periods of volatility. This guidance allows many more customers the confidence to stay invested for the longer term and achieve higher returns.

(8) Product features and potential pitfalls. Financial products such as life assurance, serious illness cover, investment bonds and pensions can be complicated. Very often people don’t fully understand the products they purchase and can be caught unaware by technical features of policies and investments. Your Financial Broker will guide you through this maze pointing out relevant issues and features to you. This gives you greater peace of mind in making these major financial commitments.

(9) Service. Your Financial Broker helps you plan for the sometimes unpredictable future. They will look to work with you over the long term through the varying stages of your life and help you with sometimes complicated and far reaching financial decisions. You can expect a high level of personal service that may not be available from a very large organisation. Financial Brokers rely to a great extent on their clients for referrals to sustain and develop their businesses so you can look forward to dealing with someone whose aim is to directly serve your interests over a long term as a client rather than a once off customer. Your Financial Broker aims to exceed your expectations at all times.

(10) Arranging the policy and implementing the plans. There can often be considerable amounts of paperwork involved in implementing financial products. Your Financial Broker will be familiar with this and ensure your policies and investments are set up correctly. In some instances there will be money laundering and other statutory compliance obligations; your broker will be familiar with these and will assist in ensuring everything is processed properly and efficiently taking a lot of stress and paperwork out of your hands.

(11) Better consumer understanding. Clear advice, better understanding and confidence in their financial plans are some of the many consumer benefits reported by the use of Financial Brokers. This in turn leads to greater discipline in sticking with long term plans and less short term reaction to market changes which may be detrimental to consumers’ financial wellbeing.

(12) Review. Depending on the nature of your engagement with your Financial Broker, an ongoing advisory service may be provided with periodic reviews to ensure your plans are updated as your personal circumstances change. Your Financial Broker will also keep a check for any errors the insurer or provider may make with the administration and management of your policy/investments. By regularly reviewing your arrangements your Broker will assist you in meeting your long term objectives and give you more time to live your life.

(13) Long term guidance. Research from Australia shows that people with long term financial advisers typically have higher savings and assets than those who do it themselves irrespective of income, starting net assets and other factors (see KPMG Econtech report – Value Proposition of Financial Advisory Networks October 2009). A Financial Broker makes the perfect fit to act as such a long term adviser. They are typically well experienced in the financial services profession, have good “people skills”, are independent of companies and the ethics of their business puts client interests first. Not only are they are well placed to guide you through the maze of selecting financial products but they can also help you to stay on course with your financial planning through all of life’s (and the market’s) ups and downs.

(14) Same long term relationship. Sometimes when dealing with large institutions you are rotated regularly to different advisers as people move around. A Financial Broker typically has a long term relationship with his/her client so you don’t have to spend time repeating yourself and can be assured that your adviser has a full grasp of your needs and requirements.

How much will it cost to engage a Financial Broker?

A Financial Broker will deal with many if not all insurers in the market so in many cases you will get a cheaper or better product at no additional cost to you as the Financial Broker is paid by commission. So you get a choice of many providers, impartial advice and personal service without extra costs and the hassle of finding the best deal yourself. If there are additional fees payable by you, these are listed in a Financial Broker’s terms of business which will be given to you in advance of commencement of work.

How expert are Financial Brokers?

Financial Brokers are obliged to have a qualification QFA or be accredited by experience. They are full time professionals dealing with people with similar needs to you and are constantly studying relevant markets and getting briefings from various product providers. Most Financial Brokers have years of experience and they question insurers and product providers rigorously on your behalf. They are able to point out pitfalls you may not see and also bring opportunities to your attention that you may not have considered.

How can I be sure my Financial Broker will put my interests first and not be guided by getting the best commission?

A Financial Broker’s best customers are repeat customers and new customers referred by satisfied clients. It is therefore, in their long term interests to put their clients’ interests first and foremost in any recommendations they make. In addition, Financial Brokers by law must put their clients’ interests above commissions in their recommendations. Brokers are subject to rigorous enforcement rules by the Central Bank of Ireland; fines, revocation and disqualification may follow failure to obey statutory codes.

Commission rates for the same type of financial products tend to be similar in the long term even though there can be short term variations. The commission on individual life, investment and pension products must be disclosed to you. Financial Brokers pride themselves in their professionalism and will be happy to demonstrate their impartiality – ask them for details of the companies they will be researching on your behalf and the results of their analysis. They are obliged to summarise this in a “reasons why” letter to you which contains the main reasons for their recommendation. The Financial Broker must account for this statement should they be called to do so by the Central Bank or Financial Services Ombudsman – the reasons he recommended a product must be genuinely in your interests and not commission related.
At the outset of engaging a Financial Broker you could ask to pay for his / her services directly by fee from yourself rather than through the policy and most Financial Brokers will accommodate this.

How secure am I dealing with Financial Brokers?

Financial Brokers offer an advisory service and will never ask for client monies to be made payable to them. Instead your cheque is made payable to the insurer or product provider you choose or the premium is paid by direct debit directly to these institutions. Therefore, there is no solvency risk in dealing with Financial Brokers. Nevertheless, they are still members of the statutory Investor Compensation Company Ltd (ICCL) covering client solvency losses for intermediaries for 90% of losses up to a limit of €20,000 per client. In addition, Financial Brokers must by law hold professional indemnity cover for negligent errors of €1.5 million. Finally, in addition to strong regulation by the Central Bank of Ireland, if you have a complaint against a Financial Broker that is not satisfied through their internal complaints procedure, you can refer the matter to the Financial Services Ombudsman who will investigate the matter with no charge to you.