When Free Financial Advice Is Not Actually Free (Pt 1)

by | Mar 22, 2024

Free investment advice is often sold as, "You do not pay us, we are paid by the providers."

Financial advisers in the Czech Republic often offer ‘expats’ free financial advice or free investment advice or even free investments (buy something and you get something else free). This is usually accompanied by a statement that ‘you don’t pay us’ or ‘our advice is free’ and ‘we are paid/financed by the Czech/offshore financial institutions or product providers. 
Not many things in life are free that have value. What are these wonderful institutions that pay financial advisers to distribute their products free to the public? What unparalleled philanthropy is this? 

Is the reality that some advisers make their money through higher charges that could be avoided?

Undisclosed higher charges (free financial advice paid for by backhanders from the provider) lead to: 

  1. Bias of sales 
  2. Conflict of interest against client best outcomes 
  3. Higher hidden charges impacting on returns 
  4. Lock-in charges and exit penalties being onerous on the clients 
The facts

We can look at the UK financial services market for reference. The comments by financial advisers in the 1980s and early 90s were similar. The investor knew that the adviser was being paid by the financial institution but did not understand what that meant in practice. In 1995, the UK regulator introduced the requirement to disclose commission on all financial products.

However, this was often conveniently tucked away at the back of the insurance/pension companies’ illustrations and often not noticed by investors. There was no requirement for the advisers to spell it out in writing themselves. However, 2014 changed all of that and the introduction of RDR banned commission on investment products and all costs and, importantly, earnings of the adviser had to be disclosed both as a percentage of any investment and in actual pounds and pence. The EU has now also adopted similar disclosure with PRIIP and MiFID rules.

What happens in practice?

Here, in the Czech Republic, we are seeing many funds being sold by banks and advisers with an ‘entry fee’, in the past often referred to as a bid/offer spread (where the buying price was higher than the selling price). While single pricing is now the norm, the entry fee is usually that amount that is deducted when the investor invests their money. Typically, this is 3% to 5% of the amount invested. In other words, if someone invested 1 million CZK into such a fund, he/she would get between 950,000 and 970,000 CZK back if the funds were encashed a day later (assuming no market movement). 
So, where did that 30,000 to 50,000 CZK go? It went to the adviser that said the advice was free and it was not paid for by a philanthropic financial institution, it was paid by the investor- directly out of their invested funds! 

Aisa International view

We always agree fees in writing for investors before we act for them and the investors get a signed agreement that covers any initial fees that would be paid for advice and implementation and fees for ongoing advice. While these fees can be deducted from the funds (saves investor having to pay DPH), these fees must be agreed by the client in advance. 
Make no mistake, these fees agreed by the client come from the client’s account and are not funded by a financial institution. 
If you come across advisers that make such claims, what else are they not telling you? 

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”. 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, where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.

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Post written by:

Chris Lean

In the UK he worked with accountants as an independent financial adviser, qualified as a Chartered Financial Planner and became an examiner for the Chartered Insurance Institute. He also qualified as a European Financial Planner and specializes in investment and pension advice to clients.

Aisa International is the only financial advice service company specialising in advice for expats that is regulated as a Securities Trader in the Czech Republic, USA, and UK.