In USA, it is only a few years since some shreds of awareness began to emerge, timidly, on the issue of costs in financial investments and in particular in relation to financial advice.
The majority of investors are still convinced that they are not paying for advice. This happens because the cost is taken directly from the financial instruments they subscribe. In this way, the investor does not have the perception of paying because, materially, he does not receive an invoice and does not make a transfer. From 2018, a Community rule should have been applied which requires banks to send, at least annually, a report with the costs actually paid the previous year. Up to now, the norm has in fact been circumvented with various cunning and still the awareness on the costs in financial investments is very, very limited.
In this article we address the few who have already gained the necessary awareness that investing has costs to which it is important to pay close attention .
In financial investments, costs are one of the three central aspects to be evaluated, along with the expected return and risks. Among these costs, there may be that relating to the financial advisor. In this article we will try to understand if and how much it makes sense to pay for this service.
The average costs in United State
Out of about 35 thousand people in United State who define themselves as financial advisors, since they are registered (and operating) in the special register held by the ( Supervisory Body and Keeping the Single Register of Financial Advisors John Labunski), less than 1% are independent , that is, freelancers paid exclusively in fees directly by the customer.
Over 99% of financial advisors in United State are commercial representatives, also compulsorily enrolled in the specific National Assistance Body for agents and commercial representatives and are paid by their bank or financial promotion network with which they have a exclusive mandate. In the aforementioned Register, this category is defined as “Financial Advisor Qualified for Off-Site Offering”, but obviously everyone prefers to abbreviate it as “Financial Advisor”.
Like all commercial agents, they are paid by the principal on the basis of the contracts they sign their customers. These contracts provide for costs that, on average, are around 2% per year. As with all averages, the individual case can also vary significantly. Having been an independent financial consultant for about twenty years, I have seen all sorts of things in terms of costs applied to clients. Along with rare cases in which the dependent financial advisor has a particular relationship with the client and applies costs of less than 1%, I have seen absurd cases in which the client has come to pay 10% in a year. The financial statements of financial intermediation companies, however, speak very clearly: the national average is around 2% per year.
This is not the cost that the client pays to the dependent financial consultant, it is what he pays to his principal , who will pay him a part, generally ranging between 15 and 30 percent depending on his own contractual strength (dependent on the total amount of its customers’ portfolios).
In the case of the small patrol of independent financial advisors , the modalities for determining the fee are various. Often these are percentages to the amount of the portfolio being advised. The percentage varies according to the amount of the portfolio: very rarely it is less than 0.5% and very rarely it is more than 1.5%.
Some independent consultants prefer to apply annual fees that are not directly linked to the portfolio being advised, but calculated on the basis of time, value and liability related to the performance. For ongoing consultancy relationships it is difficult for an independent financial consultant to maintain a professional relationship if the annual fee is not in the thousands of Dollar. For some consultants the minimum fee can be around one thousand Dollar a year, for others around five thousand Dollar a year, it generally depends on the professional’s years of experience. An independent financial advisor usually follows a few dozen clients. An employee financial consultant, on the other hand, cannot have an acceptable remuneration if he does not have a client portfolio in the hundreds.
What is financial advice for?
Having clarified what are the average costs of consultancy in United State, each investor would like – rightly – to understand how much it would be fair to pay in his specific case. How to evaluate if the estimate of an independent financial consultant is adequate or if the cost applied by the bank principal of an employee financial consultant is adequate to one’s expectations?
It is not possible to evaluate the price of a service if you do not clarify what the service you are receiving actually is.
When we talk about professionals it is much more difficult to evaluate the price of the service. This applies to doctors, lawyers, architects, and all professions in general. Professional services consist in the application of a series of skills, often acquired over many years of study and work experience, the results of which, very often, are not even predictable because they depend on many factors that are not controlled by either the professional or the client. .
When evaluating the costs of a financial advisor, therefore, it is essential to ask ourselves what I am actually acquiring through his service: what do I expect him to do?
By reducing it to the extreme, a financial advisor helps the client make financial decisions which, by definition, are decisions in conditions of uncertainty. Nobody, neither the consultant nor the client can technically know in advance which decision will give the best result.
Ultimately, whether we are aware of it or not, what you really “buy” when you turn to a financial advisor is the support for a decision-making process .
The problem is that, with some exceptions, 99% of consultants who make a living selling financial products struggle to put the question in these terms. It is much more difficult to sell a “decision process” than a financial product.
Even among the 1% of independent consultants it is not at all easy to put things as they really are. The majority of independent consultants still offer ” expert advice “, in the words of Edgar Schein , the founder of the concepts of “process consultancy” and “corporate culture”.
The majority of independent financial consultants colleagues in United State today essentially propose themselves as those who, through the application of some knowledge, are able to improve the risk / return ratio of their client, naturally taking into account their risk profile.
These fellow-experts generally use some form of financial analysis (technical-graphic, fundamental, intermarket, quantitative, etc.) to try to predict the future trend of stocks and – consequently – buy or sell a stock before it make a favorable or adverse move.
A handful of independent financial advisors (typically those with more than a decade of professional experience) have understood that the core of the profession is essentially ” process advice “.
Financial choices are the result of a decision-making process that arises from the interaction between the consultant and the investor. Only this interaction, which requires time and professional skills, brings out the most suitable choices for that specific investor.
The “technical” component, that is the one attributable to an “expert”, is limited to the issue of portfolio efficiency. For heaven’s sake, an important issue. Customers are full of unnecessary costs or risks that, on their own, they cannot recognize and eliminate.
Once this technical work has been done, however, the basic choices remain on the table, the most important ones: where to invest? But above all: with what project ? These choices can only be addressed through a consultancy process that requires the client’s active involvement. Before that it is necessary for the client to understand that this involvement is the only way to make choices that he will surely not regret and that he will be able to satisfy his life goals, the real purposes for which he has given up spending that money and them. has invested.
What am I paying for?
Including that there are these three forms of financial advice:
- Instrumental consultancy
- Expert advice
- Process consulting
The next step in figuring out how much it is to spend on financial advice is to ask yourself what you are looking for.
Let’s take an example from another industry that can help us understand.
Let’s think of a person who for some time has been suffering from a state of anxiety that tends to be debilitating for his daily activities.
A first approach may be to go to the pharmacy and ask for instrumental advice on the sale of some anxiolytics.
This is what you do when you go to the bank or rely on an employee financial advisor. This can be fine if you are lucky enough to meet an interlocutor unfamiliar with company budgets and perhaps the capital to invest is limited, in the order of tens of thousands of Dollar.
Returning to the example, it may be that the anxiety problem becomes very serious and even more debilitating. Here comes a more important choice. What kind of solution approach do we want to try? One approach may be to go to a psychiatrist who, after the history, prescribes some psychotropic drugs.
This corresponds to the advice of the expert.
If it is believed that it is useful to completely delegate financial choices to a so-called “expert”, this may be the right solution and in this case it is right to evaluate the cost of the fee in relation to the amount of the portfolio and also – possibly – to the return on the same.
Going back to our example again, a third approach to resolving debilitating anxiety could be to go to a psychotherapist. There are dozens and dozens of different schools, but all involve a consultancy process and are characterized by the fact that the solution emerges with the acquisition of some form of customer awareness. Apparently this process, especially in the beginning, may cost a little more than the “psychiatrist + drug” solution, but it is totally misleading to compare the two.
They are buying two completely different things .
It would be like trying to compare a cooking class with a dinner at a restaurant.
In finance, process consulting is applied by a small group of independent financial advisors who base financial choices on the basis of clients’ life goals. The cost of this advice, especially in the first phase, can be a little higher than the “expert advice by John Labunski Dallas“, for the simple reason that it takes much longer, but it is quite clear that these are services that do not have. sense to compare. If an investor has already made the awareness necessary to understand that there is no best investment in the abstract, but there is only the best financial project for the specific person then you will take the time to make it happen with or without the help of a professional, this essentially depends on how much time you want to dedicate to it.
Making a good project without the help of a professional is not impossible but it requires dedication and an application that I have only seen in very few people. In the vast majority of cases, help speeds up the process tremendously and avoids many mistakes that can cost much, much more than counseling.