If you are not familiar with the somewhat apocryphal razor-and-blades business model , it goes something like this: a business sells, or even gives away, one product at a low price in order to increase sales of a complementary, more profitable product. This model is often used in the financial services industry, as I will describe below, and it can also open a window to see what a business really wants from its customers.
The subject of fees in the financial advisory industry is important for a number of reasons, some of them, like how they can create clear conflicts of interest between client and advisor, I have written about before, here , and here . In this piece, however, I want to focus on the ways potential clients can figure out what the advisor or firm really wants from them, so that the client can choose the right partner.
Ask yourself the first question: What do I really want from a financial advisor?Let’s get this right out of the way: this is not an easy question for most people to answer. Do not feel bad if you you can’t come up with something immediately. It is not your fault.
First of all, the term, “financial advisor,” itself has been rendered almost meaningless by the various individuals who use it to describe themselves. The list of “professionals,” who call themselves financial advisors can include insurance salespeople, stock brokers, asset or investment managers, financial planners, and yes, even financial advisors. It would be no surprise, therefore, to hear well informed people give different answers to the same question, “why do you want a financial advisor?”
The other complicating factor is that at some point, the industry decided that it was better from a marketing standpoint to have their employees called advisors, instead of insurance agents & stock brokers. Despite there being absolutely nothing wrong with insurance agents, if you need insurance, or stock brokers, if you wish to purchase shares of stock, mutual funds, etc., Wall Street quickly realized that as brokerage commissions fell, and more people became wise to high commission insurance salesmen, the real money was in asset management.
Then why, “financial advisor,” and not, “asset manager?”
Yes, there’s a ton of money to be made off of ultra high net worth (“UHNW”) folks, but there are a lot more high net worth (“HNW”) potential clients, as well as people known in the industry as mass affluent. These definitions are esoteric and fluid, but important. UHNW people generally recognize their wealth, and are likely already working with asset managers, and even family offices. HNW & mass affluent folks, despite their relative wealth, mainly still like to consider themselves middle class, and see, “asset managers,” as something only rich folks use. At the same time, they often recognize that they do need help with their finances, so they are open to advice.
Enter the financial advisor. Asset management is a narrow scope of work. Financial advisory, on the other hand… the marketing pieces practically write themselves. Who doesn’t want to get good advice, especially from an insider? Maybe from a big Wall Street firm? Not surprisingly, however, the first advice is to transfer your assets to the advisor’s firm, so that they can better manage it.
This works pretty well. So well, in fact, that other financial services folks wanted in on the action. Financial planners found that the advisors were, “giving away,” financial plans along with their asset management services, so it was more difficult to get clients to pay for something that the other guy was throwing in for free, so it became advantageous to change their titles from planner to advisor. Insurance agents found that there weren’t really any rules around who could call themselves a financial advisor, and boy, that sounds so much better than insurance agent - especially when you’re trying to sell expensive whole life policies as, “investments,” so pretty soon, they were financial advisors too.
So if everyone’s a financial advisor…How can people figure out who to work with? Or, perhaps more importantly, how can people cut through all the marketing and sales speak to best decide who wants to work with them? The answer, as with many things in life, is: follow the money.
However the person or company is paid, or whatever they are charging you for, is what they really want to, “do,” for you.
If a financial advisor is paid by commissions on the sales of insurance products, mutual funds, etc., then what they want to do is sell you financial products, even if they include a financial plan as part of the package.
If a financial advisor is paid a percentage of your assets that they manage (“AUM”), then they want to gather as much of your assets to manage as possible, to increase their fees as much as possible, not to provide you with financial advice.
If a financial advisor charges you a fixed fee for a financial plan, then they want to help you make a financial plan.
If a financial advisor charges you a fixed fee for agreed upon advisory services, then they want to provide you with financial advice.
Caveat emptorSadly, we live in a, “buyer beware,” world. It’s up to you to determine who will serve your best interest. You can’t rely on glossy marketing materials, or a fancy website, or even the reputation of an established company, to tell you whether a particular financial advisor is going to provide you with the service or product that you really want. But, with just a little research and thought, you can get pretty close to figuring out at least who wants to provide you with that product.