Is "free" investment advice really free?
If you have ever dealt with investment advisers (Note) from banks or other advisory firms, your answer would probably be yes as they typically do not charge clients for their financial analysis, investment advisory and product recommendation services.
Different fee models
However, the truth is, although you may appear to pay nothing directly to the investment adviser who is providing you with advice or product recommendations, the investment adviser may often be receiving benefits (e.g. from product issuers) in connection with selling the products to you.
In Hong Kong, most investment advisers do not directly charge clients any fees for the investment advisory and product distribution services that they provide. This is because investment advisers generally adopt a commission-based business model, meaning that they will receive commissions (which can be in various forms such as subscription fee rebate and trailer fees if using funds as an example) from product issuers for selling the products and also acting as product distributors.
There are also financial advisory firms that adopt a pay-for-advice model (such as charging a client a flat rate, an hourly rate or a percentage of the client's investment amount under the firm's advice) for providing advisory services. Currently, such pay-for-advice model is less commonly seen in Hong Kong.
|Commission-based model||Pay-for-advice model|
|Services provided to clients||Investment advice and/or product distribution|
|Who pays the investment advisers / distributors directly?||Using funds as an example:
|How?||Using funds as an example:
||Investment advisers charge clients a flat rate, an hourly rate or a percentage of the clients' investment amount.|
There is no such thing as a free lunch
A common misperception is that commission-based investment advisers provide their services for free because they do not charge the clients directly. But most investors give little thought about the commissions that the investment advisers may receive from the product issuers. In particular, investors often overlook the fact that such commissions originate from the investment product fees that are paid by the investors. Also, commissions have the potential to cause conflicts of interest.
Note: Investment adviser is a broad term. In Hong Kong, it generally refers to intermediaries (individuals or companies) selling or advising on different types of investment products.
13 August 2018