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Advice has value. Put another way, free advice is worth what you pay for it. However, many people feel information should be free. They are used to typing a question into an Internet search engine and getting an answer. As a financial advisor, if you talk about asset based pricing, you might get pushback. You are asking clients to pay for ongoing advice. You are not the only one.
It is fair to say: “Free advice is often biased advice, because it is designed to identify a problem and position the product they sell as the solution. (You see those TV ads offering “free inspections” for your windows, roof or rain gutters.) Fiduciary is a buzzword in the financial services industry. Everyone would want a professional who put the client’s interest’s above their own or the interests of the firm writing their paycheck.
To get that kind of relationship, you need to pay. An old industry expression is: “Who is the client? The client is the one who writes the check.” The advisor works for the client and the client pays for this service.
Sometimes you pay for advice when you are already in deep trouble. The lawyer defending you on a murder charge or the hostage negotiation consultant are good examples. More often, you pay professionals to keep you out of trouble. Working with a financial advisor outsources the day to day portfolio management. This is especially true when you also work with professional money managers who have discretion within their separately managed account. Your financial advisor calls if something needs attention and you need to authorize the transaction.
What are other examples where clients pay for “preventive medicine.”
1. Medical care. This one is obvious. You have regular checkups. Your doctor reviews blood test results in a similar way the financial advisor reviews asset allocation vs. the model. At times it might appear you are paying your doctor to look at a chart, highlighting when your numbers are above or below the range. You don’t pay your doctor on a transactional basis. You pay for health insurance on an annual basis.
2. Car maintenance. Few people drive their car until it breaks down, then get it towed to the dealership. Instead, they bring their car in for periodic oil changes and a multi point checkup is done. There are mileage thresholds when items like windshield wipers might be replaced. As the car gets older, repairs become more frequent and costs go up. Car warranty programs are becoming more popular. You see them advertised on TV all the time. You pay on an annual basis, then choose the mechanic you want and “let the insurance take care of it.”
3. Tree and lawn care. If you live in an area where you can have a large yard, you might have a firm that mows on a regular basis. It’s called “mow and blow” in our area. You might have another firm that feeds your lawn and cares for your trees. You aren’t 100% sure what they do, but you pay on an annual basis. They are feeding your lawn and your trees to keep them healthy.
4. The bug guy. If you live in a house, not an apartment, you likely have a contract with a pest control company. They spray outside on a quarterly basis. If you had ants or other bugs in your house, suddenly you don’t. If you have a bigger problem (like termites) they come inside and do a different treatment, which is charged as a separate activity. You might wonder why you pay for this service “because we have no bugs.” You have no bugs because you pay for this service.
5. Financial planning and accounting. You might assume accounting means getting tax returns filed. This is “backward looking” because your CPA is organizing records of things that have already happened. You might also work with a financial planner or an accountant who helps you with budgeting. This is forward looking. You stick to a spending and savings plan because someone is watching. You pay for this oversight.
6. Weight loss programs. Yes, many people are using weight loss injections now. For decades, programs like Weight Watchers were very popular. You met as a group on a regular basis and everyone got weighed. The social element made you take it seriously. You might have rationalized you could diet and exercise on your own, but you paid for an ongoing program because the social aspect got results.
7. Personal training. How complicated could going to the gym be? Surely you can figure out how the exercise equipment works? Why pay for a personal trainer? They keep your workout interesting. They show you the proper way to use the equipment so you get maximum effect and don’t injure yourself. They keep you on a schedule. You are paying for an activity you think you could do solo because it helps you get results and maintains your focus.
8. The nonprofit fundraising consultant. You serve on the board of a charity. They are embarking on a capital campaign. They bring in a fundraising consultant. The object is to determine a realistic goal and organize board members and volunteers to solicit funds. You wonder “Why do we need to hire someone to tell us we need to raise money?” They teach you how to do it. They go with you on the first few solicitation calls to build your confidence. The third party adds value by holding people accountable for results.
9. Insurance policies. You buy life insurance while hoping you never die. You pay auto and home insurance hoping you never need to make a claim. You still send in monthly or quarterly checks to keep the insurance in place. A good insurance agent lets you know when you should increase coverage or when you might reduce coverage or change carriers. You are paying a third party for peace of mind.
10. Public relations firms. It is unlikely your client uses one, but they are a good example. You might think they are used by celebrities who get into trouble and need to repair their public image. That’s true. They are also used by people seeking to build their public image. They get mentions in the news. They get interviewed for articles or appear on TV. They are raising their public profile not simply because they are good at something, but because they are being actively promoted.
11. Lawyers. We think of lawyers as people involved in murder trials, real estate closings or company mergers. Lawyers also help keep clients out of trouble. If the client is planning to do something, a conversation with their lawyer lets them know the risks they might be taking. This helps them go into situations with their eyes open. They are paid to make you aware of the risks, even if you choose not to follow their advice.
It has been said senior executives make great clients because they are comfortable with hiring consultants to perform tasks where they don’t have specific knowledge themselves or to free up time so they can focus on what they are best at doing.
Related: Why I’m Not Too Worried About the Economy or the Market