Expert advice

Aug 27, 2015,15.09 IST

Should you pay for financial advice?

Suresh Sadagopan

You don’t pay for air, water. Neither do you pay for financial advice! So goes the thinking…

Financial advice has always been free... or so you think! The people whom most of you might have been approached were agents or distributors, who had products to sell. They were willing to talk to you and offer “advice”. But, what can you expect? If the only way the agent can earn is through commissions embedded in the products, you should be prepared to be sold products that rewards them wonderfully – and could take them to Paris & Pattaya, when they achieve their targets!

When Free advice is costlier than paying a fee - You thought you got free advice – when all you got was a sales spiel & a product that is supposed to take care of your requirement. When you do not know much about finance, all you could do is hope the person you dealt with was honest and gave you the right product. Many times, this trust is misplaced.

That’s why we meet clients saddled with a dozens of endowment plans that mature every year in retirement. The spiel which sold the product was that this is good laddering to take care of requirements in retirement. But what was left unsaid was that this product offers 4-6% returns and there were much better products with which to shore up the retirement years! Such a strategy would cost a person lakhs of rupees in lost corpus accumulation! The agent gets the best commission in this product. The client did not pay a fee – but paid very dearly anyway, indirectly!!! Such cases are very common in our country.

Poor outcomes - We see the effect of free advice being played out in lots of ways – unsuited products being pushed aggressively, sub-optimal solutions for problems clients have, high cost products offered when there are better suited low cost ones, locking clients into closed ended products, offering NFOs, offering exotic products which are difficult to understand etc. The end result is always the same – the client pays a huge price for not accessing proper advice.

Paying for services - We pay for most things we consume . We pay for services rendered – to the maid who works at home, the driver, the dhobi etc. We book tickets for travel, to movies etc., and pay a convenience fee. So, it is not that paying for services is alien to us.

When we step out of our home, we hail a cab and pay for it. We have snacks in the hotel or treat the family at a restaurant and without a word, we pay for this. We are used to paying fees to doctors, lawyers, CAs, architects etc. Back home, we watch cable TV, for which we pay too. In short, we pay for everything we use.

We even pay for things which do not give anything tangible- like taxes - as there is no choice. The government tells us to hold our head high & pay taxes! Tax is a “service charge” for the privilege of being a citizen of the country, hoping & praying for “good governance”, which of course is as elusive as the blue moon sighting!

Paying for financial services – Even for financial services, you have been paying, sometimes without your knowledge. The bank debits various charges to your account – for credit card fees, ATM card charges, charges for statements, for bank certificates etc. Banks also extract their pound of flesh when they offer you services by making you invest in products, insurances, FDs etc. Banks use your privileged information ( like bank balances and where your investments are going ) and contact you for cross selling products. Only thing is that you do not realize that you are paying for this.

These payouts you are making indirectly add no value to you. Lot of times they detract you from your goals as the investments done in this way have been done based on sales push & is not borne out of actual requirements.

So, why not engage proper advisors to advice you on finances and ensure you take proper decisions in line with your requirements?

Engaging financial advisors - Just like going to doctors & lawyers for advice, one needs to identify good financial planners/ advisors for accessing advice that is suitable for one’s specific situation. But finding the right advisor is crucial.

Read this article on - Finding the right advisor

One will need to pay a fee to such advisors, just like one pays to doctors/ lawyers. Firstly, a good advisor will ensure that wrong decisions, which will hamper a person throughout life, are completely avoided.

Secondly, a good advisor would study one’s requirement and suggest low cost options to achieve the goals. The focus is on achieving goals. Engage the services of Fiduciaries.

Thirdly, a good advisor will optimize the investments in line with one’s risk tolerance levels, asset allocation requirements, goals, taxes, tenure & liquidity needs, return expectations etc. and ensure that the returns are optimized. The recommendation would be tailor-made for the client.

All these will ensure that the client will meet their cherished goals by deploying their finances optimally

Paying financial advisors – This is a sore point for many. Financial advice has always been free! Most people don’t want to pay for it separately, even when they may be paying much, much more indirectly.

What people need to understand is the total cost of financial services & not just whether they are paying directly / indirectly. The Indirect route is far costlier as agents palm off costlier products for their own pecuniary gains. One needs to get used to paying directly for advice, like we pay other service providers.

For instance, many of us have drivers to save us the hassle of driving to & from work. We pay about Rs.15,000 per month. Over a 25 year period we would be paying over Rs.1 Crore! All this for just taking us from point A to Point B! This service, though important, is not in any way life changing. That is the same for maids whom we employ at home – important / invaluable service, but again not life altering.

The services of financial advisors can be had for much less and is certainly life altering. Their advice has the potential to transform one’s financial life. A good advisor would sort out the chaos, lay down the path to financial freedom and ensure clarity & peace of mind for the family.

That’s priceless – you would agree!

Suresh Sadagopan is the Founder of a fee-only financial advisory firm and can be reached at
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