Financial advisors: don’t shy away from them
If you want to turn one of your financial goals into reality, then using the services of a financial advisor might be a good idea. Your financial goal could consist of purchasing a home, investing or planning a trip around the world for which you need money. A financial adviser can assist you by providing giving you with targeted recommendations. If you initially thought that there are no differences amongst financial advisors, you're wrong. There is not just one category of financial advisors, but three! In this article we provide a short overview of their services, differences and fees. Thus, you can develop a better sense of orientation while taking a deep dive into the financial jungle.
Three categories of financial advisors
There are three groups of financial advisors:
Independent financial advisors
Banks / Insurance companies.
These are the most important facts at a glance:
Independent financial advisors are paid by you, the client. As such, their recommendations with respect to financial products are generally speaking unbiased
Commission-based advisors are paid by an insurance company or bank (by means of premium fees) and offer their advice to customers for free
Banks and insurance companies sell their own products and receive fees or premiums from their customers - their initial advice is also free of charge.
Independent advisors: unbiased but there aren’t that many around
You have read correctly: of the financial advisor groups, the group of independent advisors is the smallest. Note that most independent advisors specialize in a subject area. An example: Investment advisors may advise you on buying stock, but financial investment advisors are not allowed to do so - their focus is on investment funds, commercial shares or closed-end funds. Insurance advisors advise exclusively in the field of insurance. Independent financial advisors are not allowed to accept commissions, this is regulated by law. Typically, they charge between about 120-180 € per hour (on average 150 €). As a rule, the initial consultation is free.
Commission-based advisors: be open-minded
It is obvious: these advisors are not independent. They receive a premium from banks and products when they sell their products. Given this, you may assume that you don’t pay for their services at all. This is not always the case, as in some cases, you pay an indirect fee to you unbeknown to you. When you purchase an insurance you in some cases pay an indirect fee: via a higher total fee at contract start date and a higher annual fee as part of the premium itself (we recommend: always choose the net insurance rate).
Among the commission-based advisors there is a subdivision into brokers and agents. The biggest difference is that the broker can theoretically offer all products to her clients. He / she has no vendor loyalty (compared to agents). Upon contract conclusion, the broker receives a commission fee from the (financial) product provider. Even a broker that is in a position to sell a variety of products from different providers may be biased: he / she might sell the product with the best commission (which are not necessarily the best ones for you). Agents typically represent one provider (so-called exclusivity representative) or more (so-called multiple representatives). They sometimes belong to pyramid selling businesses - a company that provides a sales organization for agents.
Banks and insurances: big is beautiful?
Bank and insurance financial advisors are employed by a bank or insurance company. They only advise you on products of their bank / insurance. The bank and insurance employee is remunerated for the sales of certain products. Different products achieve different returns. As a result, the banking and insurance financial advisor might be inclined towards selling products that generate higher sales for them. A bank and insurance advisor is not a bad advisor per se; you should simply be aware of this additional factor. Money is made through: bank account maintenance fees, a share (in%) of an invested sum, or premiums on insurances.
Stay tuned: We will soon publish our next article on how to have a conversation with your financial advisor.
Written by Caroline-Lucie Ulbrich
Finelles Founder. Coach and organizational consultant (ECB, Deutsche Bank and UBS).