How valuable is free advice?
Over the weekend, I saw a very tempting offer on an ‘expat’ Facebook forum from a financial adviser that offered free advice on investments and pensions. Who wouldn’t want something for free?
I asked the adviser how she gets paid if the advice is free. She replied that the investors do not have to pay anything as the investment and pension companies pay her.
What is your job's value?
I think we would all like to think that the jobs we do have some value to someone, whether that be in the service or manufacturing sector. Not just that, the employers or those who contract for goods and services expect to pay for the value being added.
So, unless one is undertaking charity work, someone has to pay for this added value (whether that is time, labour or knowledge). What does it say about someone who hides the value that they offer? Why would they do that?
Well, it could be for a number of reasons
- The commission is very high and they would have trouble justifying the remuneration for the work they have done.
- The commission is not that high but they do not value their own expertise highly enough to justify this to their clients.
- The commission is low and it would be an embarrassment to let the client know how little they are earning.
- They may be recommending a product that pays the highest commission and this is a clear conflict of interest.
Often it is either a lack of knowledge from new advisers or a way to ‘fudge’ the issue to get new clients by not being straight with them and lead them to think they are getting something for nothing.
Back to that forum
I said ‘surely the client does pay for the advice in the product fees. The response was ‘not really’. The conversation ended when I pointed out that the commission-based products would cost less if the investment or pension companies did not have to pay the adviser and let her know who she was talking to. Then, the thread disappeared.
Commissions
Traditionally, particularly in Europe, people buy investments and pensions from insurance companies and banks. If insurance based products are sold, then Packaged Retail and Insurance Based Investment Products (PRIIPs) rules apply, where all costs must be disclosed. I do not think there is necessarily anything wrong with commission as long as the amount is explained, as well as the costs and consequences of terminating the contract early.
In fact, for some products, the commission is built in, and the adviser has no choice but to take it- though it must be disclosed and justified. Often there are exit fees to cover the commissions that were paid to the adviser. So, as you can see, the advice is not free, and the client really is paying for it on a commission-based product.
Commissions Disclosure is important in the context of PRIIPS for several reasons:
Transparency
Commission disclosure ensures transparency in the financial industry. It allows investors to have a clear understanding of the costs and fees associated with investing in PRIIPS. By knowing the amount of commission paid to intermediaries, investors can make more informed decisions about their investments.
Investor Protection
Commission disclosure is crucial for investor protection. It helps investors assess the potential conflicts of interest that may arise between intermediaries and investors. By understanding the commission structure, investors can evaluate whether the recommendations made by intermediaries are in their best interest or influenced by the commission they receive.
Fair Competition
Commission disclosure promotes fair competition among financial intermediaries. It allows investors to compare the costs and fees charged by different intermediaries, enabling them to choose the most suitable option for their investment needs. This transparency encourages intermediaries to compete based on the quality of their services rather than on hidden costs or undisclosed commissions.
Regulatory Compliance
PRIIPS regulations require commission disclosure to ensure compliance with investor protection rules. By mandating intermediaries to disclose commissions, regulators aim to prevent potential conflicts of interest and enhance the overall integrity of the financial system.
In summary, commission disclosure in PRIIPS is important to promote transparency, protect investors, ensure fair competition, and comply with regulatory requirements. It empowers investors to make informed decisions and fosters trust in the financial industry.
(I am just referring to retail packaged products offered by pension and insurance firms – investment rules are covered by MiFID and, again, all costs must be disclosed)
Fees
Professional advice firms will have a Client Agreement where the level of remuneration will be agreed in advance of any work undertaken and that fee is the same regardless of the product or investment being recommended. Anyone using the services of a lawyer or an accountant will be familiar with this. This is how Aisa International operates.
Conclusion
While it is true that the product providers (pensions, insurance and investment) pay commission to the adviser, this is because the charges of the product they provide has this built into the costs of their product. So it is misleading to say the advice is free or that the client does not pay directly for the advice. For modest investors and savers, it is often the case that commission based products give them access to advice that they could not get otherwise. Many cannot afford professional fees in addition to the money being invested. Many advisers will give their clients the choice. Whatever the case, these fees and commissions should be disclosed upfront.
Finally, I took a look at the Czech National Bank Register to see what this adviser was regulated to advise upon- she was not there and so was not even regulated to give any investment or pensions advice to anyone in this country. Before engaging a financial adviser based in this country, check they are regulated here
Image by gpointstudio on Freepik
Aisa International
Aisa International, s.r.o. is a wealth management firm with an award-winning team providing investment advice, financial planning, and asset management for U.S., U.K., and E.U. expatriate citizens residing abroad. Aisa International holds all current regulatory licenses, including the FCA license in the UK and the Investment License in the European Union. Therefore, Aisa International is uniquely qualified to provide personal financial advice for U.K. pensioners living outside of the U.K. Aisa International serves its global clients where they reside through its OpesFidelio network of highly-qualified advisors. For more information, please visit www.asiainternational.cz.
About OpesFidelio: OpesFidelio is a wealth management firm with an award-winning team who provides investment advice, financial planning, and asset management for U.S., U.K., and E.U. expatriate citizens residing abroad. Holding all current regulatory licenses, including the FCA license in the UK and the Investment License in the European Union, OpesFidelio advisors are uniquely qualified to provide personal financial advice for U.K. and U.S. citizens living outside their home countries. Headquartered at Stitneho 202/35, 130 00 Praha 3, Czech Republic.
The views expressed in this article are not to be construed as personal advice. Therefore, you should contact a qualified, and ideally, regulated adviser in order to obtain up-to-date personal advice with regard to your own personal circumstances. Consequently, if you do not, then you are acting under your own authority and deemed “execution only”. Additionally, the author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Importantly, this article is dated and is based on legislation as of the date. It should be noted that legislation changes, but articles are rarely updated. Sometimes a new article is written; so, please check for later articles. Additionally, check for changes in legislation on official government websites. Finally, this article should not be relied on in isolation.
