Why investors should pay for financial advice ?

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Every time I meet friends who are financial advisers, two completely dichotomous views emerge. One set tells me that investors are unwilling to pay fees for advice and it is, therefore, tough to be in the advisory business. The other group tells me that the markets have changed and investors are more than willing to pay. While there are greedy investors, who may seek something for nothing, many believe that investors will pay for visible value from their financial advisers. The value proposition is just being built and it's still early days. Building in an environment of trust deficit also makes it tough for financial advisers to price themselves appropriately.

The first roadblock in buying a financial service is the difficulty in establishing the proof of concept. If you buy a cup of coffee, the first sip tells you whether it's the right product or not. When you buy a financial service, you do not know what to expect and find out whether you've made the right decision much later in the future. When you pay a financial adviser, you have no idea if the advice is of good quality and worth paying for. If you discover later that it's wrong, the damage is already done. Worse, the adviser has made his money while you have lost yours. The reluctance to pay comes primarily from the difficulty in identifying, trusting and buying a mere promise, whose quality is untested.

The second problem is identification and differentiation. Unscrupulous players may aggressively push false promises. Since the service involves money and returns, greed takes over and you may become vulnerable to being conned. This makes it tough for the good financial advisers to differentiate themselves. Usually, industry associations and regulatory bodies step in to ensure that bad quality advisers are kept out (these are called gate-keeping regulations that prescribe minimum qualifications and standards). In India, financial advisers have been in operation for much longer than financial regulators and associations. This means vested interests of incumbents tend to influence policy; standards are set low enough to protect the existing players. You may like to pick and pay a genuinely competent financial adviser, but do not know where to find and verify credentials.

The third problem is the widely prevalent suspicion. If a financial adviser approaches you with his proposition, you may already be cynical, wary and cautious. This means you typically deal with multiple advisers and are unwilling to consolidate and provide complete data to a single adviser who can manage your wealth to meet your goals and needs. You are also suspicious that he is selling products, not advice. This suspicion increased significantly after financial advisers rampantly mis-sold bad mutual fund NFOs, PMS products, structured products, real estate funds and insurance products to a large number of gullible investors.

It is in this negative environment that advisers are trying to build a reputation and earn a fee. The advisers who are charging a fee have built trust and reputation over a period of time. They tend to work with a few clients in a role similar to that of a family doctor. The value they add comes from their ability to offer a range of solutions. Some do not execute deals for the customer and are fee-only financial advisers. They do not look for scale, but operate as boutiques with staff that manages the processes and paperwork. This model takes time and referrals before a client base can be built. It is also inherently not amenable to scale. This is because the value proposition of customised solutions gets diluted with numbers.

The next set is the new breed of financial advisers, which has set up shop with the intent to scale. They have not built a reputation, but they lean on processes to build trust. The most easily available proposition today is financial planning and investing for goals. These advisers offer a process-based investing approach that works to a standardised format for collecting data, creating a plan, and executing it. The investor is reluctant to pay, not because the process or proposition is weak, but because it is so easily replicated by competition. As more and more players approach investors with MS Excel sheets, showing how much to save for which goal, the proposition is quickly diluted. The entry barriers to offering such services are low. New players mean more competition and lower prices. Growth in this segment is seriously required, given the demand, but lack of regulation or an industry-level code of conduct opens up this segment to sharp practices. Reputation is built over time after a few succeed and many fail. In a poorly differentiated market, poor quality advisers will undo the pricing power of good quality advisers.

Earning a fee from the customer remains tough due to the low visibility of the value proposition. It may lie in multiple layers between the family doctor type of boutique and the standardised financial plan. Not all investors may be willing to make the shift from buying financial products to paying for a comprehensive plan that takes over their finances. Perhaps small victories is what the profession needs. Why not enable a large set of households to own their first car, buy their first home, or take an overseas vacation? These goals may not be as righteous as saving for children or retirement, but may be real aspirations that need an adviser's help. Besides, the proof of concept may be concrete and early enough for investors to begin to trust their advisers. Disclosing the entire family's finances and paying an annual fee for the 40-page comprehensive financial plan may not be a step everyone may be willing to take.

That leap of faith is too much to expect from investors holding bad quality financial products.

 

 

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