We all know that there are no free lunches in this world. Hence, the “free advice” you think you are receiving, may not be free at all ! It is just that you are not paying directly – that’s all. Unfortunately, most people do not realise that. The entire financial services space operates on commissions based on products sales.
These agents’ “advice” is tailored to pushing their products without any real understanding of the client’s full picture – their specific situation and hence their requirements. Also, such “advice” is generally return centric and not really tailored to the needs of the client. Hence, such “advice” may neither be of great quality nor would it be conflict-free.
That is why advice should be kept separate from product sourcing. It should be like a doctor – chemist relationship. The doctor prescribes the medicines after discussing the illness with the patient. The chemist just dispenses the medicine prescribed.
We already pay for various services…
Paying a fee should not be a problem as we already pay for so many services.
When we employ a driver, we pay him a salary every month. He transports one in comfort from point A to point B, allowing the passenger to relax and have time to think & prepare for any meetings ahead. The driver performs an important function. However, the role he plays is transactional. For this he is paid say Rs.15,000 a month. Assuming a driver is with a person for 30 years ( with 5% salary increase ), the amount the driver would be paid overtime is Rs.1.2 Crores ( without adjusting for time value of money )! Similarly, we pay maids, gym trainers, beauticians, lawyers, doctors, architects etc. These days there are so many new services – Image consultants, marriage planners, life coaches etc., who also charge fees.
Financial advice has been “free” all this while. They have been paying indirectly through the embedded higher costs of products sold, which goes back to the agent as commission. Hence there is a mental block against paying for these services. It is purely psychological. People don’t realise that by availing of bundled advice, they get substandard “advice” and they actually pay dearly for it, without realising it.
The compensation mechanism determines the quality of advice
That may surprise you very much. But that’s very true. Let us see how.
Agents who sell products represent their principals & get paid by them. Their loyalties lie with their principals and do their bidding in terms of selling whichever product they want to promote, at that point. Clients are a means to achieve their targets. They can never be true Fiduciaries, who put their client’s interest ahead of their own. The mode of compensation ensures that they can never offer unbiased, conflict-free advice; they can never be true advisors, even if they have the knowledge.
All of us want our advisors to act in our best interest, have sufficient knowledge to advice us, are interested in us rather than in selling some product and scooting. Then you need to employ high quality advisors who don’t sell products and are interested in offering aligned advice to you. For that to happen, they need to be only & truly be interested in your welfare. To fully align the interests of clients & advisors, the advisors should be only answerable to clients and should receive their compensation only from their clients. Only in such a case, you can be sure that their advisors work only in the client’s best interests.
This is why compensation mechanism is very important. Even if commission based & fee-based compensation are the same in money terms, the outcome will be widely different. Fee-only compensation method is hence the best from client’s view point.
Will paying a fee be a good proposition for a client?
The short answer is – Yes. For the level of services they will get, they will be paying a small amount after considering the savings that a fee-only advisor like Ladder7, will make possible.
The compensation paid to an advisor would vary based on the services bouquet that would be offered. As a client, you need to pay attention to what services you are being offered and the quality, knowledge, experience & expertise of advisors offering it.
In our case, we offer differentiated bouquet of services, as may be needed by different client types. We offer a comprehensive suite of services for those who want a deep, immersive experience. We also have a compact offering for those looking for an essential bouquet of services, that are absolutely vital & necessary. Based on this our fee will vary.
Fee paid to a fee-only advisor like us for services rendered is partly defrayed by the savings we ensure. We suggest commission-free products in most categories like Mutual Funds, PMS, AIF, Bonds, NCDs etc. due to which the client saves a lot of money, that would have been an embedded cost for them.
These savings alone takes care of a big portion or all of the fees. This is a wonderful by-product of fee-only advice. You as a client will be paying less for a whole lot more, in terms of services.
Will I pay a lump-sum fee or a variable fee?
We charge a variable fee depending on the bouquet of services one is choosing, the amount of work involved and the level of engagement needed. It is Asset under Advice (AUA) based and will vary based on the amount of assets we advice on.
People have asked us why we do not charge a fixed fee irrespective of the assets being managed.
The answer is two fold.
- A fixed fee does not offer an incentive for the advisor to participate in the upsides for the clients, which they would be engineering. The enthusiasm of the advisor would be limited by low compensation they would get, inspite of the excellent outcomes & savings for the client. This is a win-lose proposition loaded only in favour of the client.
- When responsibility increases, the compensation should increase. The CEO of a company is paid a very high salary as compared to other employees – not because he is spending anymore time for the company – but because he takes the responsibility for the growth of the company. We take full responsibility for our client’s finances and future and act as their personal CFOs and hence need to be compensated well for our oversight.
Hence, you need to understand that a AUA based variable compensation is what makes the engagement win-win and motivates the advisor to work hard in their client’s interest.
There are very few people you can truly depend on in life. It may be your parents, siblings, close friends etc. But they may not be able to help you navigate the world of finances, which is a complex area today. The only person who can help you is a true advisor – a Fiduciary, who puts your interest ahead of everything else, including his own.
We are SEBI Registered Investment Advisors ( RIA ) & Fiduciaries. We only think of your best interests all the time; you can be sure of that as we don’t distribute products & are independant.
We are fee-only advisors. We work in your best interests, always!