When someone refers to a financial advisor, what is the first thing that pops into your head to describe them best? Be careful not to insult me now: I’m proud to be a financial advisor myself.
I ask because a survey was carried out in the UK recently where people were asked exactly the same question, but they were given some help. They were asked what TV character they’d associate with the term ‘financial advisor’.
And who came out of top? None other than Mr Derek Trotter, aka Del Boy from the fantastic sitcom Only Fools and Horses.
When I read these findings, I was horrified to be honest, because I and 99% of my peers are certainly no Del Boys. But I do understand that, like any other industry, you have some bad apples who give others a bad name. And I do come across people every week who are the victims of that 1% who give dishonest advice, where their motive was nothing more than to line their own pockets.
You see, when people get “free advice” from their advisor or broker it not quite that. Just because they don’t have to part with any of their cash to get their finances reviewed doesn’t mean it isn’t costing them anything. Their advisor will get paid by the company they introduce their business to, so the payment to the broker is often disguised by the additional cost or charges built into the product they are arranging.
So, is this perception of financial advisors fair simply because of how they are paid? Or is there something more to it?
If you had to pay a fee for financial advice out of your own pocket, would it make you change the way you think about us? Or is this just too simplistic an idea? After all, you have to pay solicitors and accountants a fee for their advice, and what comes into your head when you think of them? I guess it depends really on the person giving the advice and how you value and trust them, how honest and transparent they are with what they charge you and the benefit you get from their expertise.
To help with this conundrum, let me give you a real-life example about a client of mine who came to me recently looking for life cover. The amount of cover required was about €650,000 and she needed it for herself and her husband for the next 23 years.
I will give you two examples of how this could go for her if she was to meet two types of advisors - one where a fee is paid by her up front and the other where she can receive “free advice”. You can make up your own mind which you would prefer and which advisor you’d trust most.
Free Advice Response: Yes, delighted to arrange cover for you. A fee for arranging it? God no, my advice is free to you. The life company will pay me, so it won’t cost you anything.
Having checked with all the providers I say the best premium in the marketplace is €331.07 per month. Are you happy with that? Great! Let’s get working on the paperwork.
Fee Advice Response: Yes, delighted to arrange cover for you. A fee? Yes, I’m going to charge you €150 per hour, because I won’t be receiving any commission from any life company, so your monthly premium will be based on zero commission. I estimate about three hours’ work should do it for you, but if there is any more, I will of course let you know.
Your monthly premium? That will be €265.31.
So – which advisor do you go with?
The difference in monthly premiums is €65.76. Over 23 years – as was the case with this particular client – that comes to €18,149.76.
The commission-paid advisor would also receive about €3,000 in the first year in payments and around €400 every year for the next seven as well. So the advice wasn’t free, the payment the advisor received was built into the monthly premium. So, the old saying that free advice is the most expensive really was true in this case.
In the UK, they have changed the rules on how financial advisors get paid. They wanted to make it easier for consumers to understand what advice they were paying for and they’re doing this by banning commission paid to financial advisors on some products. Under their new regime, all charges have to be agreed in advance and customers will get a very simple document setting out the charges for advice and any other fees for managing their money.
Apart from transparency, this also eliminates financial advisor bias in choosing one provider over another simply because they get paid more.
This used to happen quite a lot in the mortgage brokering days of yore. If a borrower could get approval for, say, €200,000 and Company A paid the broker 1% (€2,000) and Company B paid commission of 0.5% (€1,000), who do you think the broker might have a bias towards? Sometimes the difference in interest repayments ran into the tens of thousands, but the borrower was none the wiser.
The main concern for those seeking financial advice is that some will not be able to afford the hourly rates that fee-paying financial advisors charge, even if that’s a false economy in the long run.
The truth is there are bad financial advisors and very good ones. The latter can arrange financial products for their clients and absolutely deserve to get remunerated – as long as they deliver value to their client.
The moral of the story is to first determine what advice you need, then find a qualified advisor who you trust and one who will work on your terms, putting your interests first before anyone else’s.
I am proud to say that Limerick – more than any other county in Ireland – is awash with good advisors.