Characters or villains?
“All industries have a few bad apples. I would declare 80% of financial advisers are usually either good or very good” or “It’s just 99% associated with financial advisers who give the rest of us a bad name”
Financial agents, also called financial consultants, financial organizers, retirement planners or wealth advisers, occupy a strange position amongst the ranks of those who would sell to us. With most other sellers, whether they are usually pushing cars, clothes, condos or even condoms, we understand that they’re simply doing a job and we accept the fact that more they sell to us, the greater they should earn. But the proposition that will financial advisers come with is unique. They will claim, or at least intimate, that they can make our money grow by over if we just shoved it right into a long-term, high-interest bank account. If they could not suggest they could find higher profits 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 wouldn’t they just keep their tips for themselves in order to make themselves rich?
The answer, of course , is that most financial advisers 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 crust is by taking a bit of everything we, their clients, save. Sadly for all of us, most financial advisers are just salespeople whose standard of living depends on how much of our own money they can encourage us to place through their not always caring hands. And whatever portion of our money they take for themselves to pay for such things as their mortgages, pensions, cars, vacations, golf club fees, restaurant meals plus children’s education must inevitably make us poorer.
To make a reasonable living, a financial adviser will probably have expenses of about £100, 000 to £200, 000 ($150, 000 to $300, 000) a year in salary, workplace expenses, secretarial support, travel expenses, marketing, communications and other bits and pieces.
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So a financial adviser has to take in among £2, 000 ($3, 000) and £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 fifty and eighty clients. Of course , a few successful ones will have many more and people who are struggling will have fewer. This means that each client will be losing approximately £1, 250 ($2, 000) plus £4, 000 ($6, 000) a year from their investments and retirement cost savings either directly in upfront charges or else indirectly in commissions paid to the adviser by financial products suppliers. Advisers would probably claim that their expert understanding more than compensates for the amounts these people 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 six main ways that financial advisers get paid:
1 . Pay-Per Trade – The particular adviser takes a flat fee or a percent fee every time the client buys, markets or invests. Most stockbrokers utilize this approach.
2 . Fee only – There are a very small number of financial agents (it varies from around 5 to ten percent in different countries) who charge an hourly fee for all the time they use advising us plus helping to manage our money.
a few. Commission-based – The large majority of agents get paid mainly from commissions with the companies whose products they sell 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 agents but may not give the best comes back for savers. To overcome clients’ possible mistrust of their motives in making investment recommendations, many advisers now claim to be ‘fee-based’. However , a few critics have called this the ‘finessing’ of the reality that they still make most of their money through commissions even if they do charge a good often reduced hourly fee for services.
5. Free! – In case your bank finds out that you have money to take a position, 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 bank is only offering a limited range of items from just a few financial services companies and the bank’s adviser is a commission-based salesperson. With both the bank and the adviser having a cut for every product sold for you, that inevitably reduces your financial savings.
6. Performance-related – There are a few agents who will accept to work for approximately ten and twenty per cent of the annual profits made on their clients’ opportunities. This is usually only available to wealthier customers with investment portfolios of more than a million pounds.
Each of these payment strategies has advantages and disadvantages for us.
1 . Along with pay-per-trade we know exactly how much we will pay out and we can decide how many or even few trades we wish to perform. The problem is, of course , that it is in the adviser’s interest that we make as many deals as possible and there may be an almost alluring temptation for pay-per-trade advisers in order to encourage us to churn our own investments – constantly buying and selling – so they can make money, rather than advising all of us to leave our money for several years in particular shares, unit trusts or even other financial products.
2 . Fee-only agents 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 repair technicians and even car mechanics : will know that the amount of work supposedly accomplished (and thus the size of the fee) will often inexplicably expand to what the fee-earner thinks can be reasonably taken out from the client almost regardless of the amount of real work actually needed or even done.
3. The commission compensated to commission-based advisers is generally separated into two parts. The ‘upfront commission’ is paid by the financial product manufacturers to the advisers as soon as we all invest, then every year after that the adviser will get a ‘trailing commission’. Upfront commissions on stock-market funds may range from three to four per cent, with walking commissions of up to one per cent. On pension funds, the adviser could get anywhere from twenty to seventy five % of our first year’s or two years’ payments in upfront payment. Over the longer term, the trailing commission will fall to about a fifty percent a per cent. There are some pension plans which pay less in in advance commission. But for reasons which should does not need explanation, these tend to be less well-liked by 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 us on those products which generate them the most money. So they can tend to encourage us to put the money into things like unit trusts, funds of funds, investment bonds and offshore tax-reduction wrappers : all products which pay large commissions. They are less likely to mention things such as index-tracker unit trusts and trade 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 various products, it’s effectively the manufacturers who else decide which products financial advisers energetically push and which they hold back on. Secondly, the huge difference between in advance and trailing commissions means that really massively in the advisers’ interest to keep our money moving into new assets. One very popular trick at the moment is for advisers to contact people who have been conserving for many years into a pension fund plus suggest we move our money. Pension fund management fees have dropped over the last ten to twenty years, so it’s easy for the adviser in order to sit a client down, show all of us the figures and convince all of us to transfer our pension financial savings to one of the newer, lower-cost monthly pension products. When doing this, advisers can immediately pocket anywhere from three to over seven per cent of our total pension check savings, yet most of us could complete the necessary paperwork ourselves in less than twenty minutes.
4. As many fee-based agents actually earn most of their money from commissions, like commission-based agents they can easily fall victim to commission bias when trying to choose investments to propose to all of us.
5. Most of us will meet the 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 take a no-cost meeting with a supposed ‘finance and investment specialist’. Their own job will be to first point out the excellent and competitively high interest rates offered by the bank, which are in fact rarely either high or competitive. But then they are going to tell us that we’re likely to get even better returns if we put the money into one of the investment items that they recommend. We will be given a choice of investment options and risk users. 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 free of risk deposit account. A £50, 000 ($75, 000) investment, for example , can give the bank an immediate £1, 500 ($2, 250) to £2, 000 ($3, 000) in upfront payment plus at least 1% of your cash each year in trailing commission – easy money for little hard work.
6. Should you have over one mil pounds, euros or dollars to take a position, you might find an adviser willing to become paid according to the performance of your investments. One problem is that the adviser will be happy to share the pleasure of your revenue in good years, but they shall 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 assets rises and a reduced fee in case you lose money. Yet they will generally never take a hit however much your investments go down in value. The advantage with performance pay for advisers is that they will be motivated to maximise your earnings in order to maximise their earnings. The particular worry might be that they could take excessive risks, comfortable in the information that even if you make a loss they’ll still get a basic fee.
Was I qualified? I’ve written an e book!
One worrying feature with economic advisers is that it doesn’t seem to be awfully 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 plus awards, but the large majority avoid. One source suggested that there may be as many as 165, 000 people within Britain calling themselves financial agents. Of these about 28, 000 are registered with the Financial Services Authority because independent financial advisers and will have some qualifications, often a diploma. But only 1, 500 are fully qualified to provide financial advice. The in-house economic advisers in banks will usually just have been through a few one-day or half-day internal training courses in how to sell the particular products that the bank wants to market. So they will know a bit about the products recommended by that bank and the main arguments to convince us that putting our money directly into them is much more sensible than adhering it in a high-interest account. But they will probably not know much regarding anything else. Or, even if they are knowledgeable, they won’t give us any goal advice as they’ll have stringent sales targets to meet to get their own bonuses and promotion.
However in the field of financial advisers, not having any actual qualifications is not the same as not having any real qualifications. There are quite a few education firms springing up which offer economic advisers two- to three-day courses which will give attendees an impressive-looking diploma. Or if they can’t be troubled doing the course, advisers can just buy bogus financial-adviser qualifications on the Internet. Some of these on an office wall can do a lot to reassure a nervous buyer that their money will be in safe and experienced hands. Moreover, financial advisers can also pay professional marketing support companies to provide associated with printed versions of learned content articles about investing with the financial adviser’s name and photo on them because ostensibly being the author. A further fraud, seen in the USA but probably not yet spread to other countries, is for a financial advisor to pay to have themselves featured because the supposed author of a book regarding 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 a wall, then we’re likely to be doubly so by apparently published articles and books. In one investigation, journalists found copies of the same guide about safe investing for seniors ostensibly written by four quite different and unrelated advisers, each of whom would have paid several thousand dollars for your privilege of getting copies of the book they had not written with them selves featured as the author.