Which financial adviser is going to be right: the one who charges a fee; the one who is “free”; or; the one charging a commission? Or is it the one who does all of these?
Well I suggest that it depends on what you are hoping for and what you want from them, but the only one that is suspect is the “free” offer.
I have a simple response which I have used for many years now when presenting cost (or fee proposal) to a prospective client and then encounter any version of “the guy down the road will do this for free“. That response is:
“if you aren’t paying them then they are not working for you; so who do they work for?”
The typical reaction at this point is silence as the implications of that line of thinking sink in….and most prospective clients get the implications of that pretty quickly. IF further explanation is required then one expands upon by saying something like
“well they have an office, and a car they are running, and they are housing themselves and feeding their family, so money is coming from somewhere…..but you say it won’t be coming from you or any other clients. So who is paying them? Because whoever is paying them is who they work for. And if it is not you paying them then they are clearly not working for you, right?”
More often than not this leads to an excellent piece of conversation about the types of advisers there are, or more accurately, the types of roles that advisers can fulfill for a client.
- Be a planner. This is an exercise in looking forward strategically….figuring out how to achieve a particular objective or goal. It consists solely of time and expertise and there is no product involved. Of course this is fee-based….just as it is with an accountant, lawyer, architect, etc, etc. Notice that I simply said be a “planner”….a mortgage specialist can be a planner of how to resolve debt issues….an insurance specialist can be a planner on the optimal strategic approach to managing a wide range of risks, only some of which might best be managed by transferring them to an insurer…and so on.
- Be a broker. This is about going to market to find the right product solution…it may follow on from planning or it may be a result of someone else’s recommendation to the client (e.g. a lender telling them they must have a particular type of insurance to secure the loan). It may simply be a result of the prospects own research and conclusion on what they want (e.g. particular types of investments). Regardless of the motivation or scope of service it is fundamentally a role which involves finding an optimal product fit. I see nothing wrong with that being done on a commission basis if the client agrees…after all that is a remuneration method which might be more properly labelled “a success fee”….there is only a payment to the broker if they find a solution that the client is happy with. If no solution is found then there is no cost to the client….if both parties are happy to work on that basis and understand that it is a brokerage role (as opposed to one party thinking it is a planning role for example) then it is absolutely professional and perfectly acceptable. Who is actually paying the broker though is often the question, and does this undermine the brokers ability to represent the clients interests? Of course the possibility always exists that an adviser can allow potential remuneration to shape their thinking…that conflict always exists. But then every remuneration model has conflicts for an adviser who allows themselves to prioritise remuneration considerations over clients’ interests. At the end of the day though this is a function where the client decides whether the broker shall be paid….if a solution is found which the client approves of, and with full knowledge of the brokerage involved and the conflicts that presents, then it is within the clients’ control to consent to.
- Be an adviser. This is essentially a backwards looking function…reviewing what the prospect has currently and comparing that to their circumstances and needs to determine fitness for purpose. That is typically a combination of strategy and product review with a view to making adjustments and modifications as required to stay on track. This is a time and expertise role as well and should be fee-based unless the product implementation was done by that adviser and ongoing remuneration is involved with the product – perhaps. There wil be differing views amongst advisers and consumers as to what the appropriate mix is here for remuneration, but the critical thing in reality is that the client and the adviser are both clear about it, and that both are happy with it.
None of these are “free” to the consumer though.
“Free” to the consumer simply means the consumer is either unaware of how the adviser is being remunerated, or who the adviser is working for. Let them know that you are working for them, and how you are being paid by them regardless of the function being asked of you. If at the end of all that a consumer objects to the concept of paying you for your time, expertise and the legal risks you take in being an adviser, then don’t work for them.