The investment and pension free advice scam. Warren Buffet’s ‘Price is what you pay, value is what you get’ comment is understood by everyone, but do people think about this before paying for a service?
For those of us that have been involved in financial services for a long time, investment and pension free advice offered by financial advisers in the UK was commonplace until around 10 years ago. So why has it largely gone now, and why is it still offered outside the UK?
Free advice is usually worth exactly what you pay for it, no cost, limited value.
However, investment and pension ‘free advice’ is more sinister in the financial advice sector, as it is definitely not “free”. Over 5 years, it costs around 300% more for commission-driven against fee-based advice.
THREE HUNDRED PERCENT!
Anyone offering a “free service” is either providing pro-bono advice or is being paid elsewhere or they are lying. We have long been actively promoting transparency in fees and what value that provides.
You Don’t Pay Us, We Are Paid By The Institutions That Hold Your Money. We offer investment and pension free advice
I am still seeing websites that make this ludicrous claim. The fact is that this is not free, because institutions immediately pay commissions to salespeople as an enticement for selling their products. This is done by either deducting that amount from your investment straight away or by locking you into high charges for 5 years or more. I have seen charges between 150-250% annually higher for up to 10 years!
It also means that the adviser is not disclosing the advice fees, in many jurisdictions; It may be now banned but is still rife.
If a financial adviser values his/her service, then a price should be put on this service and the value to the investor explained. This fee should be agreed upon before any advice is given and should be confirmed in a signed client agreement that is binding on both parties- just like any other professional service.
ETFs v Active Funds
At this point, it is worth mentioning this in the context of investment and pension ‘free advice’. No one agrees with excessive fees that provide no extra value or, worse still, have adverse effects on performance.
This excellent article by Alistair Cunningham explains the argument between passive investment advisers and active fund advisers. Passive funds, which are always part of our portfolios do drive down costs. However, there are advice firms out there that recommend the whole client portfolio goes into passives and sell this as a full advice package. I agree with the article, those firms probably do not have the ability to assess active funds or are too lazy to bother.
Rather than telling their clients about the ‘restricted advice’ they promote this as a holistic ‘holier than thou’ complete investment service and charge circa 1.25% pa for this- obviously, the passive funds make the service look competitive in total compared to an adviser that has the skills and knowledge to research and select both passive and active funds.
Where is the value?
If you are not offered a client agreement at the start of a relationship with a financial adviser, with a clear outline of fees and what you will get for those fees, walk away.
Marketing investment and pension free advice were long ago banned through the introduction of RDR in the UK, and clients are better off as a result.
However, offshore, we are seeing commission companies continue to apply their salesman trade. Our concern is that some now charge “nominal” fees making out they are fee based, and then take the commissions as well! That is illegal in much of the developed regulated world.
Be wary that some firms will charge full annual advice fees and do nothing other than place you in inexpensive passives (again, used correctly by most financial advisers as part of a portfolio then passives are a positive). The problem is pure passives add little in the way of value but give the appearance of reducing cost but really hide the disproportionate effect of these advice firms’ fees which should be reduced for this restrictive advice.
Article Date 21st May 2021
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