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Why an Agent (Commission) is Better than an Advisor (Fee) Sometimes... rather many a times!

It is well established that separation of 'Financial Advice' and 'Financial Product Sales' is a great idea to avoid conflict of interest. Mixing both, that means advice from a product seller, may not always be unbiased. Paying fees for advice only, (where adviser gets paid by the client only and won't earn any commission or remuneration for the products he /she recommends) indeed is a great idea logically.
Sometimes (rather most of the times!) we humans don't behave logically.

I see three types of people:
  • Majority - reactive people,  who need to be chased to do get them buy and renew their Insurance policies or start and keep the SIP going; 
  • Minority - people who get the financial plan and advice by paying fees and then get too busy with their work that it keeps them postponing the implementation of plan / advice for eternity;  
  • Rarity - proactive people who plan and implement meticulously.

Financial Advisers add little value to the rare proactive category of people. For the other two, financial advisers add immense value. Now what motivates a financial adviser to get those people doing what is good for them? Remuneration of course; it is a hard motivation, though there may be other soft motivations like ethics, relationship etc. I believe hard motivations rarely fail. If remuneration causes conflict of interest, then lack of it should cause inaction.

So, an adviser / financial planner who has already earned his / her fees on advice and not having any commercial interest in the implementation*, is 'logically' not keen on implementation part. Professionals and Businesses (organizations) unlike other humans / laymen, driven more often driven by rationale to mind their business. But a commission earning agent, is very keen to see you do what is planned or implement the advice or Advice along with selling. That's because, he / she makes money by getting you do that.

Do I mean to be arguing for negating or jeopardizing the 'great idea' I initially mentioned about in the beginning?


There is certainly 'conflict of interest' problem in the 'Advice cum Sales' model.
My argument was to make a point that the Fee / Advice only model also has a problem.

'Advice cum Sales' may cause inefficiency in your finances but the 'advice only' may cause (for majority of the reactive and half-proactive people) the effects equal to 'no advice' resulting in far more greater inefficiency.

What's the best way then?

Solution is actually similar to having a family doctor. You may not be 100% sure with a stranger doctor, whether all the diagnostic tests, medications etc he / she recommends are genuinely needed for your case or just he / she is trying to inflate the bill. But you feel comfortable with a family doctor and trust he / she won't take you for a ride.

Have a caring Adviser you can rely on without bothering about his / her remuneration structure.

But how to be sure whether your adviser cares for you?

You'll mostly come to know about it naturally thanks to your 'human' side. But don't worry if you feel it's not that easy. Don't try to figure out whether Adviser cares for you. Rather try to figure out whether the adviser cares his own reputation, brand and growth & longevity of the business. Any professional, including financial adviser, who cares for his reputation, cares for his clients!

*PS: A fee only adviser not necessarily charging only upfront advisory fees or financial planning fees; in fact most 'fee only' advisors today charge initial as well as ongoing fees based on Assets Under Management (AUM). Some may be charging fixed annual fees plus some AUM fees. That ensures there is a remunerative motivation for the adviser to implement the plan / advice. But most financial products in India don't offer cheaper differentially (lower) priced alternative plans like direct plans of mutual funds. So, on these products, for example insurance, you pay adviser fees and also higher price of the product (equal to or almost equal the agent offered product / plan) then you end up paying higher total price / fees. Ideally a professional should charge for the Advice only and not for the implementation, like a doctor who charges 'consultation fees'. But in India even doctors don't survive merely on consultation fees! So, no remuneration model / structure can be perfect.


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