Price or Value? Part 1
Advice - What are you paying for?
The following quote is attributed to John Ruskin, a prominent 19th century social thinker and philanthropist:
“It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money – that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot – it can’t be done. If you deal with the lowest bidder, it is as well to add something for the risk you run. And if you do that, you will have enough to pay for something better.”
This is a principle that is understood by most. In modern parlance “If you pay peanuts, you get monkeys” or “No such thing as a free lunch”. But is the flip side acceptable? – “Reassuringly expensive” (a bit like “too big to fail”).
When it comes to paying for advice it can sometimes be difficult to know what a fair price is. The very need for advice implies a lack of understanding of the matters at hand – how then to value the advice you are given?
The first comment I would make, dealing specifically with financial advice, is that you should always ensure that the cost of advice is separate and distinct from any product charges. Advice should stand alone and the cost should never be contingent on the purchase of a plan or product.
Next we come to the ad valorem issue (in proportion to the value for those of you who skipped Latin at school). Is it right to pay 10 times as much for advice on a £1 million investment as a £100,000 investment. For the adviser there is certainly a risk premium in play, i.e. the financial implication to the business if the advice is unsound. But, taking Professional Indemnity cover into account, the risk of one compared to the other is certainly not tenfold.
What are you paying a financial adviser for when it comes to advice? I suggest the following: Expertise, experience, time and resources. You are also paying for the right to redress if wrongly advised, so with that comes peace of mind. Pity the poor adviser then (my tongue is only slightly in my cheek) who has only your modest fee to gain but the might of the FCA, the FOS and ultimately the Civil Court to face if he or she should guide you however inadvertently down the wrong path!
To my mind, the right advice is a very valuable commodity. Look closely at the qualifications and experience of those advising you. A 25 year old may have all the qualifications but frankly cannot have the necessary life experience (let alone anything else) to advise someone in their 50’s or beyond.
The Chartered Financial Planner qualification is the most prestigious in the financial services industry but, apart from many hours of study and exams, it only demands 5 years’ experience. Always look beyond the qualifications. A very good tip is to ask for references from clients in a similar position to yourself who the adviser has helped in the past.
In the next article in this series I look at the way advisers charge for their services and explore whether clients are getting good value for their money.
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