Heroes or villains?
“All industries possess a few bad apples. I would declare 80% of financial advisers are usually either good or very good” or “It’s just 99% of financial advisers who give the associated with us a bad name”
Financial agents, also called financial consultants, financial organizers, retirement planners or wealth advisers, occupy a strange position amongst the rates of those who would sell to all of us. With most other sellers, whether they are pushing cars, clothes, condos or condoms, we understand that they’re simply doing a job and we accept the more they sell to us, the greater they should earn. But the proposition that will financial advisers come with is unique. These people claim, or at least intimate, that they can create our money grow by more than if we just shoved it right into a long-term, high-interest bank account. If they couldn’t suggest they could find higher returns than a bank account, then there would be simply no point in us using them. However, if they really possessed the strange alchemy of getting money to grow, why would they tell us? Why didn’t they just keep their secrets to themselves in order to make themselves rich?
The answer, of course , is that most financial agents are not expert horticulturalists able to grow money nor are they alchemists who can transform our savings into precious metal. The only way they can earn a brown crust area is by taking a bit of everything we, their clients, save. Sadly for us, most financial advisers are just salesmen whose standard of living depends on how much of our money they can encourage us to place through their not always caring hands. And whatever portion of our cash they take for themselves to pay for things like their mortgages, pensions, cars, holidays, golf club fees, restaurant meals and children’s education must inevitably create us poorer.
To make a reasonable living, a financial adviser will probably have costs of about £100, 000 to £200, 000 ($150, 000 to $300, 000) a year in salary, office expenses, secretarial support, travel expenses, marketing, communications and other bits and pieces. So a financial adviser has to take in in between £2, 000 ($3, 000) plus £4, 000 ($6, 000) per week in fees and commissions, possibly as an employee or running their own business. I’m guessing that on average financial advisers will have between 50 and eighty clients. Of course , several successful ones will have many more and people who are struggling will have fewer. This means that each client will be losing somewhere between £1, 250 ($2, 000) plus £4, 000 ($6, 000) per year from their investments and retirement cost savings either directly in upfront fees or else indirectly in commissions compensated to the adviser by financial products suppliers. Advisers would probably claim that their expert understanding more than compensates for the amounts they squirrel away for themselves within commissions and fees. But many studies around the world, decades of lending options mis-selling scandals and the disappointing returns on many of our investments and pensions savings should serve as an almost noisy warning to any of us tempted in order to entrust our own and our family’s financial futures to someone seeking to make a living by offering us economic advice.
Who gets rich – clients or advisers?
There are 6 main ways that financial advisers get compensated:
1 . Pay-Per Trade – The adviser takes a flat fee or a percentage fee every time the client buys, markets or invests. Most stockbrokers use this approach.
2 . Fee only – There are a very small number of financial advisers (it varies from around five to ten percent in different countries) which charge an hourly fee for all your time they use advising us plus helping to manage our money.
3 or more. Commission-based – The large majority of agents get paid mainly from commissions with the companies whose products they sell in order to us.
4. Fee-based – Over the years there has been quite a lot of concern about commission-based advisers pushing clients’ money directly into savings schemes which pay the biggest commissions and so are wonderful for advisers but may not give the best results for savers. To overcome customers’ possible mistrust of their motives for making investment recommendations, many advisers at this point claim to be ‘fee-based’. However , a few critics have called this the ‘finessing’ of the reality that they nevertheless make most of their money from commissions even if they do charge a good often reduced hourly fee for his or her services.
5. Free! – If your bank finds out that you have money to get, they will quickly usher you into the workplace of their in-house financial adviser. Right here you will apparently get expert assistance about where to put your money completely free of charge. But usually the lender is only offering a limited range of products from just a few financial services companies as well as the bank’s adviser is a commission-based salesman. With both the bank and the adviser having a cut for every product sold for you, that inevitably reduces your cost savings.
6. Performance-related – There are a few advisers who will accept to work for somewhere between ten and twenty per cent of the years profits made on their clients’ investments. This is usually only available to wealthier customers with investment portfolios of over the million pounds.
Each of these payment methods has advantages and disadvantages for us.
1 . Along with pay-per-trade we know exactly how much we will spend and we can decide how many or even few trades we wish to perform.
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The problem is, of course , that it is in the adviser’s interest that we make as many investments as possible and there may be an almost alluring temptation for pay-per-trade advisers in order to encourage us to churn our investments – constantly buying and selling – so they can make money, rather than advising us to leave our money for many years in particular shares, unit trusts or even other financial products.
2 . Fee-only advisers usually charge about the same as an attorney or surveyor – in the range of £100 ($150) to £200 ($300)) an hour, though many will have a minimum fee of about £3, 000 ($4, 500) a year. As with pay-per-trade, the investor should know exactly how much they will be paying. But anyone who has ever dealt with fee-based businesses – lawyers, accountants, surveyors, architects, management consultants, computer restoration technicians and even car mechanics : will know that the amount of work supposedly performed (and thus the size of the fee) will often inexplicably expand to what the particular fee-earner thinks can be reasonably taken out from the client almost regardless of the quantity of real work actually needed or even done.
3. The commission paid to commission-based advisers is generally split up into two parts. The ‘upfront commission’ is paid by the financial product manufacturers to the advisers as soon as all of us invest, then every year after that the adviser will get a ‘trailing commission’. Upfront commissions on stock-market funds can range from three to four per cent, with trailing commissions of up to one per cent. On pension funds, the adviser could get anywhere from twenty to seventy five per cent of our first year’s or two years’ payments in upfront percentage. Over the longer term, the trailing commission will fall to about a fifty percent a per cent. There are some pension programs which pay less in upfront commission. But for reasons which should does not need explanation, these tend to be less popular with too many financial advisers. With commission-based advisers there are several risks for traders. The first is what’s called ‘commission bias’ – that advisers will extol the massive potential returns for all of us on those products which earn them the most money. So they may tend to encourage us to put our own money into things like unit trusts, funds of funds, investment bonds and offshore tax-reduction wrappers — all products which pay generous commissions. They are less likely to mention things such as index-tracker unit trusts and exchange traded funds as these pay little if any commissions but may be much better for our financial health. Moreover, by setting different commission levels on different products, it’s effectively the manufacturers who else decide which products financial advisers ardently push and which they hold back upon. Secondly, the huge difference between upfront and trailing commissions means that they have massively in the advisers’ interest to maintain our money moving into new assets. One very popular trick at the moment is perfect for advisers to contact people who have been saving for many years into a pension fund plus suggest we move our cash. Pension fund management fees possess dropped over the last ten to 20 years, so it’s easy for the adviser to sit a client down, show us the figures and convince us to transfer our pension savings to one of the newer, lower-cost monthly pension products. When doing this, advisers may immediately pocket anywhere from three to seven per cent of our total pension check savings, yet most of us could comprehensive the necessary paperwork ourselves in less than 20 minutes.
4. As many fee-based advisers actually earn most of their money from commissions, like commission-based advisers they can easily fall victim in order to commission bias when trying to decide which investments to propose to all of us.
5. Most of us will meet a bank’s apparently ‘free’ in-house agent if we have a reasonable amount of money within our current account or if we ask about adding our savings in a longer-term, higher interest account. Typically we’ll end up being encouraged by the front-desk staff to consider a no-cost meeting with a supposed ‘finance and investment specialist’. Their job will be to first point out the wonderful and competitively high interest rates provided by the bank, which are in fact rarely possibly high or competitive. But then they are going to tell us that we’re likely to get even better returns if we put our own money into one of the investment items that they recommend. We will be given a range of investment options and risk profiles. However , the bank will earn much more from us from the manufacturer’s commission selling us a product which is not really guaranteed to return all our capital, than it would if we just chose to put our money in a virtually risk-free deposit account. A £50, 1000 ($75, 000) investment, for example , can give the bank an immediate £1, 500 ($2, 250) to £2, 500 ($3, 000) in upfront payment plus at least 1% of your money each year in trailing commission — easy money for little hard work.
6. Should you have over one million pounds, euros or dollars to invest, you might find an adviser willing to become paid according to the performance of your opportunities. One problem is that the adviser will be pleased to share the pleasure of your income in good years, but they’ll be reluctant to join you in the discomfort of your losses when times are tough. So , most will offer to take a hefty fee when the value of your investments rises and a reduced fee if you lose money. Yet they will generally never take a hit however much your investments go down in value. The benefit with performance pay for advisers is they will be motivated to maximise your returns in order to maximise their earnings. The particular worry might be that they could get excessive risks, comfortable in the knowledge that even if you make a loss the can still get a basic fee.
Are I qualified? I’ve written a book!
One worrying feature with monetary advisers is that it doesn’t seem to be terribly difficult to set yourself up as 1. Of about 250, 000 registered economic advisers in the USA, only about 56, 500 have the most commonly-recognised qualification. Some of the others have other diplomas and awards, but the large majority no longer. One source suggested that there may be as many as 165, 000 people in Britain calling themselves financial advisers. Of these about 28, 000 are registered with the Financial Services Authority since independent financial advisers and will have some qualifications, often a diploma. But just one, 500 are fully qualified to provide financial advice. The in-house monetary advisers in banks will usually only need been through a few one-day or half-day internal training courses in how to sell the particular products that the bank wants to sell. So they will know a bit about the products recommended by that bank and the main arguments to convince us that putting our money into them is much more sensible than adhering it in a high-interest account. However they will probably not know much about anything else. Or, even if they are educated, they won’t give us any objective advice as they’ll have strict sales targets to meet to get their bonuses and promotion.
However in the field of financial advisers, not having any actual qualifications is not the same as not having any kind of real qualifications. There are quite a few teaching firms springing up which offer financial advisers two- to three-day courses which will give attendees an impressive-looking diploma. Or if they can’t be bothered doing the course, advisers can just buy bogus financial-adviser qualifications on the Internet. A few of these on an office wall can do much to reassure a nervous trader that their money will be within safe and experienced hands. Furthermore, financial advisers can also pay specialist marketing support companies to provide them with printed versions of learned articles about investing with the financial adviser’s name and photo on them because ostensibly being the author. A further scam, seen in the USA but probably not however spread to other countries, is for a financial advisor to pay to have themselves featured because the supposed author of a book about investing, which can be given out to potential clients to demonstrate the adviser’s credentials. In case we’re impressed by a few certificates on the wall, then we’re likely to be twice as so by apparently published content articles and books. In one investigation, journalists found copies of the same book about safe investing for seniors ostensibly written by four quite various and unrelated advisers, each of whom would have paid several thousand dollars for that privilege of getting copies of the guide they had not written with by themselves featured as the author.