Three Ways Free Financial Advice Ends Up Costing More

200000 Vietnamese dong notes, worth less than US$10 each but more than most free financial advice

Some free advice is worth every penny you pay for it, but free financial advice (like free medical or legal advice) often ends up costing more than most fees.

Clearly, I don’t believe all free financial advice is bad, as I often share it myself in at least two ways:

A. When the advice is general, based on widely known and vetted principles and does not take up much of my time to share, like the “9 Simple Money Rules on One Index Card” (which I have been meaning to share a revised version of myself), and

B. When the advice is bundled with other services for which I am charging a client a fee for my time to make the advice relevant to them.

Simply paying for something does not make it good or better, but as with free medical and legal advice, there are at least three ways free financial advice can end up far more than paying a clear fee for it.

1. Free advice may be uninformed or incomplete

While some professionals and knowledgeable amateurs may give free advice, there is almost no bar preventing those with little experience or education but plenty of confidence from suggesting something that sounds good but may be useless.ย  Being licensed and valued enough to be able to charge for advice often, but not always, filters out those who don’t know what they’re talking about.

2.ย Not having professional advice often leads to wasted time and missed opportunitiesย ย 

This is the opportunity cost problem, with the most obvious financial example being someone who leaves all their savings in cash for decades because they never got good advice on how to invest it and grow it into many times more than leaving it in cash.

3. “Free” advice is often provided by those getting a commission to sell a product that benefits the salesperson more than the buyer

The most expensive form of free financial advice tends to be that provided by professional financial advisers who get paid by selling financial products, which often pay them at least 1% and often up to 5-10% of the amount of the investment product sold.ย  (The movie “The Wolf of Wall Street” used an extreme example of 50% commission-laden investment products). Fees are fine when you know what they are (transparency) and get your money’s worth from them in a higher level of service, but paying fees in the form of commissions risks buying what is in the salesperson’s best interest rather than in your best interest.

In earlier posts I mentioned the importance of asking how your financial adviser gets paid, the fiduciary rule, and a survey on competitive fee rates charged by financial advisers across the industry.

I know advice is not something many people like to pull out cash or a checkbook to pay for, and I often find it easier to make money by making clients money than to set fair fees for advice only, but I believe it can not be overstated how important fee transparency (knowing how much you are paying and for what) is.