We have had a few calls recently from askaboutmoney users with questions around the common theme of why should they pay a fee for advice.
This is a potentially huge question which i hope will promote a healthy debate.
In summary some points to consider before dismissing the benefits of paying a fee for advice:
An adviser has to have professional indemnity insurance. Therefore if they give advice which turns out to be negligent or incompetent you as a client of that adviser are protected by that insurance policy.
Advice provided by a regulated adviser is covered by both the investor compensation scheme and the ombudsman service.
Many products on sale in ireland cost the same if you use an adviser as if you approach the company directly. If your adviser rebates some or all of their commission then the cost can be lower using an adviser.
Some advisers have access to unique products or services which are not generally available to the retail investor. An example would be institutional class investment funds which are not offered directly to the public.
For example in the last 12 months the I shares msci world index ETF has increased by 23.82% to close of business on 16th feb 2011. The etf has a low Total Expense Ratio (TER) 0.5%pa
The institutional class global core equity fund we recommend has increased by 27.05% over the same period net of the 0.54% TER.
The lesson here is that the lowest cost fund isn't always the best. Equally we are able to justify charging an annual advice fee where we are clearly adding value that is greater than the cost of our fee.
Equally for investors who are able to take slightly more risk a global small and value fund has appreciated by 32.63% over the same 12 months and net of fund management charges.
Since risk and expected return are related helping investors to work out what kind of a risk return trade off they wish to take is a huge value add that a competent adviser can bring to the investment process.
Understanding investor biases is another area where a good adviser can help investors. The field of behavioural finance has highlighted a number of biases that cause investors on average to make bad decisions examples such as overconfidence, regret avoidance familiarity bias, loss aversion and mental accounting are all examples of biases which have been observed.
In the USA dalbar Inc have studied the performance of an average investor compared to simply buying the s&p 500 over 20 year periods and consistently find that investors can underperfom the market by up to 5%pa. On average investors chase performance and end up buying high and selling low.
A good adviser can ensure that investors remain disciplined and capture more of the Market return that is there for the taking rather than being excessively influenced by short term factors or the media.
By paying a fee for advice you free yourself from the risk of product bias that can occur when your adviser receives a commission payment from a product provider. Commissions are an inducement to sell a product, the greater the commission the greater the inducement. Wheras a fee-only adviser works on behalf of their client and has no incentive to recommend one course of action over another and simply offers the most appropriate recommendation for that client. Although a commission-based adviser must offer advice on products which are "suitable" but they do not have to operate in a fiduciary capacity. They do not have to do what is in the best interests of their client but rather simply ensure that the product they recommend is suitable. A tracker bond may well be a suitable investment for a client, but if they have a debt might it not be more appropriate to use capital to repay that debt rather than invest it? A commission based adviser who recommends a client repay debt is simply not getting paid at all.
A good adviser is more than just a product salesman. A financial planner can help with gaining clarity around your financial goals and working with a team of expert professionals can solve problems of taxation, insurance, retirement provision, estate planning and even charitable giving.
When looking to employ a true wealth manager look for the designation certified financial planner (CFP) and also someone who operates on a fee basis and who offers a true wealth management service such as I have described and you should find the fee charged is worth every cent.
As John Ruskin said "it's unwise to pay too much, but it's worse to pay too little"
Finally to quote Red Adair "if you think it's expensive to hire a professional, try hiring an amature"
(source of performance data bloomberg 16/2/11)
This is a potentially huge question which i hope will promote a healthy debate.
In summary some points to consider before dismissing the benefits of paying a fee for advice:
An adviser has to have professional indemnity insurance. Therefore if they give advice which turns out to be negligent or incompetent you as a client of that adviser are protected by that insurance policy.
Advice provided by a regulated adviser is covered by both the investor compensation scheme and the ombudsman service.
Many products on sale in ireland cost the same if you use an adviser as if you approach the company directly. If your adviser rebates some or all of their commission then the cost can be lower using an adviser.
Some advisers have access to unique products or services which are not generally available to the retail investor. An example would be institutional class investment funds which are not offered directly to the public.
For example in the last 12 months the I shares msci world index ETF has increased by 23.82% to close of business on 16th feb 2011. The etf has a low Total Expense Ratio (TER) 0.5%pa
The institutional class global core equity fund we recommend has increased by 27.05% over the same period net of the 0.54% TER.
The lesson here is that the lowest cost fund isn't always the best. Equally we are able to justify charging an annual advice fee where we are clearly adding value that is greater than the cost of our fee.
Equally for investors who are able to take slightly more risk a global small and value fund has appreciated by 32.63% over the same 12 months and net of fund management charges.
Since risk and expected return are related helping investors to work out what kind of a risk return trade off they wish to take is a huge value add that a competent adviser can bring to the investment process.
Understanding investor biases is another area where a good adviser can help investors. The field of behavioural finance has highlighted a number of biases that cause investors on average to make bad decisions examples such as overconfidence, regret avoidance familiarity bias, loss aversion and mental accounting are all examples of biases which have been observed.
In the USA dalbar Inc have studied the performance of an average investor compared to simply buying the s&p 500 over 20 year periods and consistently find that investors can underperfom the market by up to 5%pa. On average investors chase performance and end up buying high and selling low.
A good adviser can ensure that investors remain disciplined and capture more of the Market return that is there for the taking rather than being excessively influenced by short term factors or the media.
By paying a fee for advice you free yourself from the risk of product bias that can occur when your adviser receives a commission payment from a product provider. Commissions are an inducement to sell a product, the greater the commission the greater the inducement. Wheras a fee-only adviser works on behalf of their client and has no incentive to recommend one course of action over another and simply offers the most appropriate recommendation for that client. Although a commission-based adviser must offer advice on products which are "suitable" but they do not have to operate in a fiduciary capacity. They do not have to do what is in the best interests of their client but rather simply ensure that the product they recommend is suitable. A tracker bond may well be a suitable investment for a client, but if they have a debt might it not be more appropriate to use capital to repay that debt rather than invest it? A commission based adviser who recommends a client repay debt is simply not getting paid at all.
A good adviser is more than just a product salesman. A financial planner can help with gaining clarity around your financial goals and working with a team of expert professionals can solve problems of taxation, insurance, retirement provision, estate planning and even charitable giving.
When looking to employ a true wealth manager look for the designation certified financial planner (CFP) and also someone who operates on a fee basis and who offers a true wealth management service such as I have described and you should find the fee charged is worth every cent.
As John Ruskin said "it's unwise to pay too much, but it's worse to pay too little"
Finally to quote Red Adair "if you think it's expensive to hire a professional, try hiring an amature"
(source of performance data bloomberg 16/2/11)