With your Financial Advisor, is a transactional or ongoing relationship better?

Like it or not, finances are an important part of our lives. We all need to take decisions during our lives which have huge implications. The decisions sometimes can determine whether one will be wealthy or will just about work!

Decisions like having an appropriate amount of insurance, investing a certain sum for retirement funding from the beginning, buying a home and it’s timing, taking loans and the quantum of loan, how much to spend on children’s education etc., are all decisions that people would be taking in their lives.

But such decisions may get taken without proper knowledge, perspective, experience & expertise.  Many decisions are not carefully considered ones, come from an emotional place, is borne out of social dynamics/ peer pressure etc.

Suffice to say that there is a lot at stake. A credible financial adviser would help in a major way with such decisions. The adviser would leverage his/her knowledge, experience, expertise & perspective to ensure that their client’s decision is aligned with their long-term objectives and well-being. They would also offer their advice as a third party, which brings in objectivity.

So, it is reasonably clear that a financial adviser can be helpful. But what kind of relationship will be most advantageous?

Transactional or on-going engagement?   

Transactional engagements are everywhere. We go to a doctor for an ailment that is troubling us, get diagnosis & medicines. We pay a fee for it. Same is the case with lawyers, CAs etc.

This works wonderfully when the stakes are low. For a person who is healthy & gets a fever occasionally, a run to the doctor-next-door is fine.

When the same person is old, in not so great health condition, it makes sense to have a doctor who knows the situation well. In that situation, what matters is that the doctor knows the entire history, their past treatments, their allergies etc. and then tender advice based on the evolving situation.

Just the fact that the doctor already knows everything & his advice is based on that saves a lot of time & cuts out costly trial and error method. It is hugely reassuring to know one is in safe hands.

The ongoing relationship established here is worth beyond the time the doctor spends with the patient.

In an ongoing engagement the prior knowledge would have already yielded insights which will be leveraged for the benefit of the client. In a transactional relationship, to come to an insight stage, takes a lot of time.

That is why when the stakes are high, people engage the professionals on an on-going basis. Companies and wealthy people have lawyers & CAs to advise them, on an ongoing basis. They pay them a fee (sometimes called a retainer) to just be able to get their timely advice, as may be required.

Relationship & Access

In high quality professional relationships which are critical to one’s success, forging such relationships are extremely important. Such professional relationships, even if accessible on a piecemeal basis, may not be as valuable as an ongoing engagement.

This is because, in an on-going engagement, the professional would get continuous inputs & would be situationally aware. In such an engagement, the adviser has a wealth of prior knowledge about their client.  

Any recommendations will hence be holistic & fully aligned to the client situation. The time for turnaround will also be quick as they are aware of the background as also due to their expertise. The chances of errors in such a situation is low.

Transactional relationships may be cheaper. They are also far less valuable.

On-going professional relationships are win-win relationships which enriches and empowers the client and is profitable & a source of a good, regular income for the professional. This is true in financial advisory as well.

The other important point is that some professionals are not easily available at all & one needs to wait out their turn in a transactional relationship. This by itself can prove to be costly. An ongoing professional relationship ensures access & immediate attention.

Due to these two reasons alone, on-going relationships with high quality professionals is a great choice, even if it is more expensive.

What is the right advisory fee & method?

A professional relationship and the remuneration should be commensurate with the benefits that a professional (or an adviser) can confer on their client.  Hence, the remuneration should be based on the value added in a relationship rather than how much time the adviser spends to deliver advice.

In fact, very competent advisers spend less time to offer advice as they know the subject well, have dealt with similar situations in the past and have a wealth of experience & expertise to leverage on. The value of the critical inputs they would offer at important junctures would be phenomenal. That should be compensated.

A professional financial adviser should be able to participate in the growth they are facilitating in their client’s lives. If that incentive is taken away from them and the client wants to pay them a transactional fee, the relationship gets set at a much lower level. Many advisors would not accept such a relationship at all.

Remuneration for responsibility

A professional adviser shoulders the responsibility of ensuring good outcomes. The higher the stakes, the higher would be the responsibility. Higher responsibility would have to be compensated with commensurate remuneration.

A CEO of a company also spends the same 8-9 hours per day. But his income would be significantly higher than even the top-level executives, as he shoulders the responsibility of delivering on the vision, carrying the people along & meeting the targets of the company.

Conclusion

An ongoing relationship ensures full knowledge and deep insights about the client situation. This translates to high quality advice, with least chances of errors. It also ensures quick advisory turnaround as an ongoing advisor is always accessible to the client.

Remuneration is for the responsibility that the advisor is taking on. It is also for the privileged access to them at critical points. Remuneration is based on the value delivered, not just the time spent.

Getting hold of competent, high quality advisers on an ongoing, retainer basis is a winner for everyone.