Financial advice that costs nothing is worth nothing…

21 November 2023

The issue of the cost of financial advice is a thorny matter not openly addressed by the media in Italy but only discussed in hushed tones among industry experts. For me, the matter is simple: if a quality financial advisory service adds value, it is only fair that the service be remunerated.

In essence, there is a fundamental misconception: if we were to ask Italians who rely on financial advisors how much they pay for the service, many would claim to pay nothing. This, of course, is not true; the cost of the service is “hidden” in the fees of the products selected by the advisor, who then receives a commission from the product providers.

In short, the client believes they are receiving advice without paying for it, while the explicitly fee-based financial advisory service struggles to take off for many operators.

A consultant who genuinely helps clients doesn’t need to “hide” the value of their service

A consultant who diversifies the portfolio offers clients access to new and interesting investment tools like private markets, and helps clients avoid emotional decisions doesn’t need to “hide” the value of their service; in fact, they should be transparently compensated.

Let me get straight to the point: we have no problem purchasing premium products and services, those labeled as “aspirational.” We do it with cars, handbags, luxury hotels; we know we could get an equivalent product at a lower price, but we want to “treat ourselves well.”

Why is having a personal trainer cool, but having a personal financial advisor isn’t?

Financial advice should also become an aspirational service: having a skilled consultant managing one’s savings is not only necessary but as intelligent a choice as having someone telling you that you’re “breaking your back” during your gym workouts on the multipower.

Professional access to new asset classes like private markets and digital assets or to emerging and niche markets requires specific skills and professionalism. The advisory industry should make a significant effort to make clients appreciate the value of the advisory service they provide.

But what concrete value does financial advice add?

Many have attempted to quantify the value of professional financial advice precisely. The approaches vary: if you’re curious, it’s worth looking at Vanguard’s analysis (dubbed “adviser’s Alpha”), T. Rowe Price’s, or Morningstar’s.

The conclusions are similar: in general, the “value” a financial advisor adds to a client’s wealth seems to range between 1.5% and 3% annually, where the amount of wealth, age, and different types of advisory approaches are just a few variables determining the final result.

Enhancing one’s value by offering tailor-made solutions

It is precisely in “uncertain” moments like the one we are experiencing today that industry operators can transform and add something to their role as guides for investors.

A recent EY survey (EY Global Wealth Research Report 2023) shows that 87% of Italian investors (compared to 79% at the European level) have changed their investment approach in response to the decrease in the value of their portfolios.

The survey also found that more than 42% of Italian respondents regularly seek additional independent financial advice in response to portfolio volatility.

The value of advice is higher the more the service is “tailor-made.”

An interesting study published in the Journal of Financial Planning estimates the value of new evolved advisory models, such as goal-based advisory, which can add up to 15% to a client’s wealth. Far from the maximum 3% that the client might not perceive.

A unique range of opportunities.

If one can respond promptly and in a personalized way to the needs and desires of clients in turbulent times, one can also build loyalty and truly become an added value for the financial well-being of the people they guide.

Major financial players are already moving in this direction, embracing opportunities offered by artificial intelligence. Thanks to AI, new “investment experiences” can be created, more personalized, enjoyable, and understandable, all with a more efficient and scalable service.

In short, having a personal advisor providing a smart service is as useful and cool as having a personal trainer.

At Wealthype, this is precisely what we focus on, and we have already helped thousands of advisors improve their work. For a demo of our tools, you can contact us using the link below and discover how to apply Machine Learning principles to your business processes.