How does the independent financial advisor work and how much does it cost? What are the investments most recommended by independent financial advisors? Starting from the analysis of the European rules for financial advisors, we see some very useful indications for all small investors.
The savings and investment market is dominated by banks and insurance companies that have always sold both products and “implicit” advice to the customer. It means that in the commissions that the customer pays to purchase stocks or bonds, fund units and ETFs etc …, a part goes to remunerate the seller. A formula that easily leads to conflicts of interest – I sell you what suits me, even if you are unable to understand it or to bear the risk – and that makes the customer think that he has not paid for the advice.
To better protect small investors, in recent years in Europe the new Mifid and Mifid 2 rules have laid the foundations for a change: customer profiling based on his financial knowledge and risk appetite is mandatory, such as greater transparency on the reporting of costs and commissions and on the methods of remuneration of the various services, including consultancy, by financial intermediaries.
In addition, the figure of the independent financial advisor has been institutionalized, that is, who only sells financial advice, getting paid. Just like lawyers or accountants.
Who is the independent financial advisor and how does he work
The european rules on independent financial advisors impose certain requirements, compliance with rules for financial advice and limits on costs and fees. For those residing in the US or elsewhere there may be different rules, but what reported on the guidelines for independent financial advisors can be useful to evaluate what you rely on.
In order to enroll in the official registers of independent financial advisors, it is necessary to possess capital requirements (insurance with certain standards), organizational requirements, good repute (not to have criminal proceedings) in addition to the condition of independence. In other words, they must self-certify that they have no connection with financial subjects that could push them to suggest a specific investment. A trivial example: even if my husband or wife work in the bank I have to say it.
The job of the independent financial advisor is to get paid for the board because he doesn’t sell financial products.
Independent financial advisors analyze the client’s financial situation, not only considering investments but also insurance coverage or retirement planning and build a personalized recipe. Then they follow the customer in negotiations with the bank, insurance or broker, in order to best finalize the purchase or sale of the recommended investments.
How much does an independent financial advisor cost?
The fee of the independent financial advisor varies according to the complexity of the portfolio to be built or undone, in case you want to change an investment made previously. And therefore, as happens for lawyers and accountants, based on the time that the consultant must dedicate. In a nutshell, we are talking about a figure that can range from a maximum of 1% of assets to 0.4%. In Britain, where the independent consultancy model is in the majority, a 2016 study reported hourly fees between £ 150 and £ 195.
Financial advisor fees are added to investment and transaction costs. The independent consultant will work to be very low: recommending expensive tools is generally against his interest. On the other hand, as far as intermediaries are concerned, in the payment reports we often find an overall cost (say 2%) which also includes the seller’s remuneration, although it is mandatory to clearly report it. In Italy, in the first year of application of Mifid 2, Consob called on intermediaries to apply the discipline.
What are the investments most recommended by independent financial advisors? The least expensive, like ETFs
The only certainty of the investments are the costs, therefore a good financial advisor will try to offer the client investments with low costs: a well-structured, diversified and low-cost portfolio will be an advantage, considering that in the long-term investment there can be periods of lose.
If today I invest a capital of 12 thousand euros or dollars, half on the equity markets and half on the global bond markets, at a cost of 0.3%, in ten years (assuming the same market trend of the last 19 years), I will have 19,600 in my pocket. While the same investment, using a more expensive product mix (1.5%) would make 17,300, that is, over 2,200 less.
ETFs are the most recommended investments by independent consultants also for those who have 5 thousand or 10 thousand euros to invest. Exchange Traded Funds are listed funds that reproduce a market index as faithfully as possible. It means great diversification and risk reduction (if one stock goes wrong, another will do well). Management costs can be more than ten times lower than those of traditional funds, precisely because they do not have to remunerate a manager or a sales network.
Take the S&P 500, the basket of the 500 most important stocks listed on Wall Street: the ETFs that “copy” it offer investors the opportunity to buy the index of the American stock exchange with management fees that do not exceed 0.15%, the cheaper, they are even satisfied with 0.05%. With a traditional fund, the cost would have been between 1.5% and 2.5%, not always rewarded by a better performance than that of the index. From the Morningstar analysis of june 2019, in the last ten years 91.2% of the funds available for European investors who invest on the US stock exchange have failed to beat the ETFs that reproduce the WallStreet index.