For-Free or For-Fee?There are many places you can go to get a free financial plan. If they sell mutual funds, count on the proposal including mutual funds (instead of cheaper ETFs). If they sell insurance, count on a recommendation to buy some (and probably not cheap term).
Even if you pay, there may still be biases. If they sell investments, you may be encouraged to move your portfolio to them. Do that and they may even waive their fees for the plan. The result is the same as if you got a free plan. Their real model might be asset accumulation.
However, the criticism may be unwarranted. Time and expertise cost money. A monkey will work for peanuts but maybe you don't want a hire a monkey.
For-FeeWhat about for-fee planners? We're reluctant to hire them when we can get free plans elsewhere. They may also get compensated for the investment or insurance sales that arise from their recommendations.
The optics vary.
To appear independent, they may send you to someone else in their firm. In the bank-owned world, the investment advisors make referrals to the insurance specialists and share in the compensation. Management may get incentives to ensure both groups to work together.
In private firms, revenue can be shared too. Let's say an accountant sets up a company with a planner, investment advisor and insurance advisor. All revenue could go to this one-stop shop and get shared through the ownership structure.
For-fee planners often establish informal affiliations. They could get paid for the referrals they give by getting referrals in return. That's reciprocity. Buyer beware again.
Other Sources For Free AdviceIf you're getting advice from someone who doesn't sell financial products, you may be getting good advice. Bloggers, journalists and authors can be excellent sources. They make their money in other ways.
Retirees may have valuable advice if they've kept their knowledge current and can connect with younger generations. Former insiders are another source but find out why they left. If you sense they were booted out for poor performance, they have biases.
If they're giving free advice, how much are they putting online? If none, they may have difficulty learning new skills. Perhaps they don't have much to say that would withstand public scrutiny.
The SellersYou could get good advice from someone who's selling but you might not. If the advisor only sells mutual funds, will you get any recommendations to buy low-cost ETFs?
When Paid Advice Doesn't PayI've met advisors who wanted to give unbiased paid advice but they couldn't create a viable business model. So they added commission-paying elements like investments or insurance.
You're not keen to pay when you can get free advice elsewhere. This says the for-fee advisors haven't been able to show value for your money. To compensate, some will give you lengthy financial plans that are mainly fill-in-the-blank templates. There's more value to you if that content is online, hyperlinked and kept up-to-date. You could then get a much shorter plan — maybe one that fits on a single page and has clear action steps.
The DilemmaEven if you're paying for advice from someone who's really good, they probably sell something related and get rewarded for referrals. Without those subsidies, the advice would likely cost you more.
The Biggest ProblemThe biggest problem with free advice is compliance. Or rather, your lack of compliance. We place less value on what's free even when we agree. Here's the paradox. If you pay, you're more likely to value the advice, act and get the benefits. You then get more than your money's worth.
- The elusive search for financial advice (Globe and Mail, Nov 11, 2011)
- Where does your insurance advisor get advice? (new)
- The car mechanic: Are you paying for effort or results?
- Why financial planning is ignored
- The foolproof measure of trust
- The effect of banks selling you insurance online
- Dan Sullivan on selling your wisdom
- image courtesy of Bartlomiej Stroinski (Poland)
Podcast 144 (4:59)
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PS What do you think of my free advice?