“Many receive advice but only the wise profit from it.”
– Harper Lee
Harper Lee’s quote is less about applying advice than it as about being discerning who you take advice from. Not all advice is equal. This is certainly true when it comes to financial advice. Few investors taking advice understand that there are significant differences in financial advice models.
The industry is divided into two types of advisors:
- “Those that sell products and use advice”
- “Those that sell advice and use products”
They may sound like the same thing however the difference is significant.
The first advisor would be like a pharmaceutical salesperson trying to sell you their latest drug and telling you why you need it. Their goal is to make money from the sale of the drug and their company pays them a commission to motivate their efforts.
The second is like a doctor who charges for a consultation and assesses the client to establish their medical condition and then prescribes the best medicine to address the diagnosis. The doctor is indifferent to brand and is only concerned with the client’s healing. The doctor gets paid for the advice and his success determines the long-term relationship with the patient.
This is the simplest explanation I can provide to illustrate the difference in the tied financial advice model and the independent advice model.
The tied advice model being advisors employed by companies whether it is insurers asset managers or banks. They represent their employers’ products, and in many cases, they are either required or induced to sell that company’s product. They are also limited by that company’s offering. While these companies might argue that the advice is “appropriate” it certainly isn’t objective.
This is like approaching a pharmaceutical salesperson when you’re sick and asking them to suggest the best course of treatment. Do you really think they are not going to suggest a competitor product even if it was better for you?
Interestingly while many investors would never contemplate this for their health they do so for their wealth. Their thinking being they feel safer with the big brand. I’ve often heard clients say, “if things go wrong, I have broader shoulders I can sue”.
They clearly haven’t tried to sue a major insurer yet!
Just for comfort remember all financial advice providers must have Professional Indemnity Insurance cover in cases like these to protect clients whether you are tied or independent.
The independent advisor is not tied to any product manufacturer and can select the best product for the client irrespective of who the provider is.
They have multiple relationships with different companies getting access to a wider range of expertise than just a single entity. This gives them a broader offering and more inputs to ideally address the client’s needs. Independent advisors can often secure better pricing for their clients as they are not employees or price takers. As independent advisors earn fees for advice, this improved pricing is used to enhance clients’ outcomes.
The independent advisor is often a smaller practice and builds a business off the back of their excellence as they can’t rely on a big brand to attract clients. In the world of advice, size does not matter unless the advice firm is using scale to negotiate better prices for clients.
Advice is about excellence which a client ultimately experiences at an individual level. Make sure to check an advisor’s qualifications, experience and get references.
While I have covered the primary differences in the advice models remember you can find weak and strong advisors in both advice models albeit the tied advisor may be more restricted from providing the ultimate solution.
I hope this helps when you consider finding the right advisor for you. The below quote sums up the advice you really want to avoid!