The Hidden Cost of "Free" Financial Advice

It still baffles me that a common quote I hear when speaking to potential clients is, "I don’t pay my financial adviser; it’s free." It sounds like a great deal—why pay for something if you don’t have to? However, the truth is that "free" financial advice is rarely free at all. Instead, it's often a way for advisers to avoid disclosing the commissions they earn from selling financial products. These hidden commissions can come at a high cost to you, the client. They can impact your investment returns, limit your financial growth, and create conflicts of interest that may not always work in your favor.


Why "Free" Advice Isn’t Really Free

Many financial advisers who claim to offer "free" advice operate under a commission-based model. Instead of charging clients directly, they earn money from financial institutions whose products they recommend. These commissions are baked into investment funds, insurance policies, and pension plans—costs that are ultimately passed on to you.

Pro Tip: Ask your adviser, "How do you get paid?" A transparent adviser should have no problem answering this question. Even if you don’t see an explicit fee, you may be paying through higher product charges, lower returns, or being locked into financial products that aren’t the best fit for your needs.


How Commission-Based Advisers Make Money

Commission-based advisers typically earn their income through one or more of the following methods:

Upfront Commissions: Before your money is invested, a percentage of it is taken as a commission. This can range from 3% to 10% or more, immediately reducing the amount you have working for you.

Trailing Commissions: Some products pay ongoing commissions to the adviser if you hold them, slowly eating into your returns over time. If you have a portfolio of mutual funds, then check if the funds pay the adviser an ongoing commission.

Bonuses & Incentives: Many financial institutions reward advisers with perks such as bonuses, trips, and other incentives based on the amount of their products sold. This creates a strong motivation to sell specific products, even if they’re not in the client's best interest.

Hidden Fees in Investment Products: Some investment funds and insurance policies include built-in fees that cover the adviser’s commission, making it difficult for clients to see how much they pay. It's not uncommon in the offshore financial markets for clients to be recommended structured note products that are heavily weighted with commissions built in and the amount hidden away in the small print of a complex product. This is a common theme we often see with clients. Some notes pay the adviser as much as 15%.

Pro Tip: If an adviser pushes one product over another, ask if they receive a commission and even ask for them to put this is writing . If they hesitate, that’s a red flag.



The Risks of Commission-Based Advice

The commission-based model can create serious conflicts of interest, leading to:

Biased Recommendations: Advisers may steer clients toward products that generate higher commissions than those best suited to their financial goals.

Higher Costs for Clients: Hidden fees and ongoing charges can significantly reduce long-term investment growth.

Lack of Ongoing Support: Some advisers focus on selling products rather than providing long-term financial planning and support.

Limited Product Options: Many commission-based advisers are tied to specific financial institutions, restricting their ability to offer independent advice.

Pro Tip: If an adviser isn’t regularly reviewing your financial situation, they may have only been interested in the initial sale.

A Smarter Approach: Fee-Based Financial Advice

A better alternative is to work with a fee-based financial adviser. This approach ensures transparency, aligns the adviser’s interests with the client’s, and provides unbiased financial guidance.

How Fee-Based Advice Works

Flat Fees or Hourly Rates: Clients pay a clear, upfront fee for financial advice, similar to how they would pay for legal or accounting services.

Percentage of Assets Under Management (AUM): Some advisers charge a percentage-based fee on the assets they manage, ensuring they are motivated to grow your investments.

Pro Tip: A fee-based adviser should provide a full breakdown of costs upfront—if they don’t, ask for it.

How to Choose a Transparent Financial Adviser

If you want to ensure you’re getting honest, conflict-free financial advice, ask potential advisers these key questions:

How are you compensated? A reputable adviser will be open about their fee structure.

Do you receive commissions from the products you recommend? If the answer is yes, ask for full disclosure.

Are you independent or affiliated with a financial institution? Independent advisers have access to a broader range of financial solutions.

Can you provide a breakdown of all fees and costs? Hidden fees are a red flag—transparency is essential.

What services are included in your fee? Look for advisers who offer comprehensive financial planning, not just product sales.

Pro Tip: If an adviser avoids discussing fees or commissions, walk away.

Conclusion: The True Cost of "Free" Advice

While "free" financial advice may seem appealing, it often comes at a higher cost than you realise. Commission-based advisers have strong incentives to recommend high-fee products, which can significantly reduce your long-term financial returns.

Choosing a fee-based financial adviser ensures that your adviser works in your best interests, not selling products for commissions. At Hebden Consulting, we believe in complete transparency. Our fees are clearly outlined, ensuring you know exactly what you’re paying for. We aim to provide honest, expert financial advice that prioritises your success.

Ready to take control of your financial future?  Please reach out to us today. Let’s build your financial success—without the hidden costs.

Contact us today if you would like a full, in-depth report of all your charges.

 

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Andrew Heron