You get what you pay for with financial services

You get what you pay for with financial services
18 July 2013

There are two ‘critical’ services that I am happy to pay for. The first is health (doctors, dentists and other health related services) and the second is financial advisors.

I am often staggered that people I know are reluctant to pay for financial advice but happy to waste their money on hairdressing, wine or other alcohol, impulse buys and excess.

But one of the most critical factors I have discovered whilst seeking a financial advisor is they need to put their clients' interests first. Often financial advisors are paid commission against products they sell, in my opinion this creates a conflict of interest and research indicates the advisors interest (their commission) is often a higher priority for them than their client’s interest (return on investment). Sure there are some financial advisors that receive commission who have the strength of character and values to put their clients interests first, but the research suggests it is a minority.

Conflict of interest

A New York Times article by Susanne Craig and Jessica Silver-Greenberg about former brokers at JPMorgan highlights this point:

“These financial advisers say they were encouraged, at times, to favor JPMorgan’s own products even when competitors had better-performing or cheaper options. With one crucial offering, the bank exaggerated the returns of what it was selling in marketing materials.”

Fee based or commission

Whilst commission earning financial advisors are mainly obliged to inform you of their commission earnings, I still feel much more comfortable seeking out fee only advisors, those advisors that take an hourly rate from me.

Think about how many services you pay for on an hourly or ‘set fee’ basis. It could be tennis or golf lessons, piano lessons, a haircut, a one-hour pampering session, or even the cost of a meal at an expensive restaurant. The fees are clearly discussed and known in advance, no difficult calculations just clear dollars and cents.

Ask your advisor to detail those fees, and how else she will make money on you. What makes up her total compensation?

Prepare to pay

If you are getting your financial advice for ‘free' (i.e. commission based), you are not getting an adviser who is putting your needs above his own or those of his company. Smart and un-conflicted financial advice is worth something, so get used to paying for it if you aren't willing or able to manage your investments for yourself.

Skin in the game

Another crucial factor to clarify with a financial advisor is do they have their own money invested in the policy or shares. If not, why not? I certainly would never buy shares, a policy or commodities based on their recommendation if they did not put their own money in.

Financial advisors are, in my opinion, a major service that we should all consider. When you collaborate with a financial advisor you feel comfortable with in a transparent relationship focused on your needs, you free yourself to focus on what you value most in life. How do you choose a financial advisor?

Comments

  • ConsumerWatch
    ConsumerWatch
    2013-07-19T15:07:50

    Wise words, in general far too many people seek out a financial adviser and actually agree a fee, like you would with an accountant or lawyer. As for commision agents it is worth reading the study: "The Market for Financial Advice: An Audit Study," published last year by the National Bureau of Economic Research.

    A group of academic researchers devised sample portfolios and hired a group of actors to take them around to various banks and brokerages.

    The result? Brokers missed very few chances to get it wrong, almost routinely recommending changes even when the sample portfolio was fine and promoting high-cost managed mutual funds over lower-cost index funds. "Our evidence suggests that adviser self‐interest plays an important role in generating advice that is not in the best interest of the clients," the paper concluded.

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Author
Head of Behavioral Finance
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