Ok, there’s no problem with fee-for-service advisors. It’s kind of noble, a journeyman’s approach to the business. And it’s the right fit… for a minority of clients.

The real issue is that there is a lot of talk about investment advisors, and whether the common reward structure – commissions, including trailing fees, offered at different rates, primarily from mutual funds – is in line with the client’s best interests. And that’s an important discussion. But one that sometimes leads to a (i) vilification of both mutual funds and commission-rewarded investment advisors, and (ii) a romanticization of fee-for-service investment advisors.

What do you think would happen to readership numbers if the New York Times went advertising-free, but started charging $8-10 per issue at the newsstand? Do you want their news that much more than other sources? Do you think you’d buy your favourite magazine or keep paying those cable TV bills if the true cost of that content weren’t supported by advertising? My point is that sometimes these tacit agreements that make financial models more palatable for the end consumer have a beneficial effect. If financial advice were both optional and up-front-expensive, I believe – on average – we’d see the public’s investing and savings behavior change for the worse. Most of us would opt to google our way to our own investment strategy. And for all the debate and criticism as to whether mutual funds or advisors can outperform the index, we often forget that self-directed investors have an amazingly consistent history of significant underperformance.

chart of the day, The Average Investor Underperforms, december 2012

Proof that you stink at investing

Does the industry need to stricter and higher standards around conflict of interest, transparency, education and governance? Absolutely.  Do clients need to be educated on how advisors make money and what to expect from them in return? Absolutely. But fee-for-service financial advice – while a noble idea – is very unlikely to benefit the public in the either the short or long term.

Julian Scarfe

Strategic marketing consultant & digital media expert, helping clients in the investment industry - mutual fund, hedge fund & ETF firms, advisor organizations, IR and other financial services. Strategy, branding, web, social, outreach, inbound, video, sales support materials, marketing cost auditing.