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Financial advisers should become fee-independent

Have you just had a cold call from a long lost financial adviser, even one working for a global bank? These are tough times for the so-called independent financial advisers as according to the Merrill Lynch/Cap Gemini World Wealth Report a quarter of their rich clients withdrew some or all of their funds from wealth management in 2008.

The immediate cause is understandable, a global financial crisis that sent many investors rushing for the exit. Some got their earlier than others, and an amazing 50 per cent of assets were held in bonds or cash in 2008.

Low trust

Almost half of those surveyed had lost trust in their wealth managers and advisers. After all if a respected institution can entrust money to Bernie Madoff then who can you trust?

But it is not just money being taken out of investments that is making independent financial advisers desperate for new business. The trend is now towards investing in asset classes that traditionally pay low or no commission to advisers: cash, bonds and precious metals.

Savvy investors are also discovering exchange traded funds which have much lower charges than traditional mutual funds. Over time saving those seemingly small charges will compound up to significant outperformance, and that is guaranteed.

Indeed, the traditional wealth management model with free advice in exchange for hidden fees is under severe pressure. Even hedge funds are finding their success fees driven down these days.

Big banks operate on a slightly different model with seemingly free investment advice recovered by the internal commission structures of the banks with multiple investments requiring multiple fees within an organization.

Banking expenses

Do not be fooled, this is very expensive wealth management. Just look at the suits, attractive young staff, smart offices and cars. You can do it all much more cheaply yourself with an online brokerage account, ETFs and a modicum of good sense.

What seems to be the future for financial advisers is for them to follow the rest of the industry and clean up their act. That would mean charging a fee for objective advice and not actually selling any financial products.

A purely advisory adviser can then recommend assets like gold which a traditional financial adviser will avoid like the plague because gold pays no commission. Perhaps it is a time to get back to basics and look for value-for-money and an absence of hidden charges.