2024-11-13 14:28:00
Why should I pay for something that is offered to me for free?
This is a common question, and in many cases it makes sense. After all, if something necessary is offered at no cost, why pay? However, there is a very old concept in the market that makes us reflect: “if you are not paying for a product, you are the product”.
The phrase “If you don’t pay for a product, you are the product”, often attributed to Andrew Lewis, refers to a reality known for a long time.
Radio listeners do not pay for broadcasts, just as open TV viewers do not pay anything for the signal. This happens because your attention is marketed to advertisers.
Today, it’s clear that to access ad-free content, we need to pay for it. But, what about in the case of free investment advice?
Does it really exist?
Although it seems obvious not, There are still many people who believe in myth of free investment advice.
This confusion gained prominence with the CVM Resolution 179which amended CVM Resolution 35, and demanded more transparency about the remuneration of autonomous investment agents.
READ ABOUT | CVM Resolution 179: what it is and how it impacts the investor
The change caused discomfort among many professionals who said they did not charge for the service, generating strong pressure for the implementation to be postponed.
Originally scheduled for July 2023, the rule finally went into effect on November 1, 2024.
This postponement reflected the resistance of some sectors to accepting that “free” advice is not, in fact, costless – the investor is often the one who pays, indirectly, through commissions or recommended products.
But what is the reason for the resistance?
The new resolution requires financial intermediaries to disclose on their websites clear information about their ways of remuneration and possible conflicts of interest.
This includes transparency regarding fees charged, spreads e administration and performance fees.
READ ABOUT | How does an investment advisor make money?
O most sensitive pointhowever, is the obligation to send customers a quarterly statement detailing the remuneration obtained from the investments made.
This statement must detail the total amount of remuneration, the type of investment, the nature of the payments and the portion allocated to investment advisors.
With this measure, it will become clear to the investor that the so-called “free investment advice” is, in fact, a myth.
But is this requirement a problem for Warren? Fortunately, no.
Since its creation, Warren’s proposal has been based on total transparency, adopting the fee-based remuneration modelwhich is considered one of the most modern in the world.
UNDERSTAND | Discover the 3.0 model and understand how it puts the customer at the center of the experience
What is the difference between fee-based and commission-based?
The remuneration commission-based (commission-based) is a model where the investment advisor receives a commission on sales of financial products.
An independent agent’s compensation is directly tied to the revenue they generate for the brokerage, usually as a percentage of sales or profit.
This model, when it is not transparent, can be dangerous for the investor.
UNDERSTAND | How does the investment advisor commission impact your assets?
Imagine two financial products: a COE (Structured Operations Certificate) that pays 3% commission, and a fund more suited to the client’s profile that pays just 0.2%.
The advisor can be encouraged to recommend the product more profitable for hime not the best fit for the customer.
READ MORE | How conflict of interest hinders your investments
On the other hand, in the modelo fee-basedthe financial advisor charges a fixed fee for services provided, typically as an annual percentage of the assets under management.
In that case, there is no incentive to recommend products that are misaligned with the customer’s goalsas all products generate the same revenue for the consultant, regardless of the choice.
Not UK, the commission-based model was banned in 2012 precisely to avoid conflicts of interest and promote greater transparency.
Since then, financial advisors have needed to be paid directly by clients, ensuring that advice is in their best interestswithout external influences.
In Brazil, the fee-based model is common in the private banking segment, which serves clients with high net worth.
Warren’s innovation was to bring this model to retail, making it accessible to a wider audience and democratizing access to a consultancy service aligned with the client’s interests.
SEE ALSO | Transparency in investments: in video, Warren founders reinforce position against conflict of interests
A pillar for the development of the financial market
Transparency in the relationship between investment advisors and their clients is essential for the sustainable development of the financial market.
When investors clearly understand how their advisors are compensated, they are more qualified to make well-informed decisions aligned with your real needs and objectives.
This level of clarity strengthens trust in the financial system, preventing possible conflicts of interest, where the advisor could prioritize their commissions to the detriment of the client’s best interests.
As the Brazilian market grows and matures, the need for ever greater transparency becomes evident.
The implementation without further delay of CVM Resolution 179 is crucial to this process, as it establishes standards that ensure that all intermediaries disclose their forms of remuneration in a clear and accessible manner.
Only with the full adoption of this regulation will we be able to promote a more ethical, reliable and balanced financial market for all participantswhether you are an investor or investment professional.
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How can investors identify and mitigate potential conflicts of interest when working with commission-based financial advisors?
**Interview with Investment Expert: Understanding Commission-Based vs. Fee-Based Models**
**Interviewer:** Thank you for joining us today! A lot of investors are confused about the differences between commission-based and fee-based financial advisory models. Can you explain how these systems work?
**Expert:** Absolutely! The commission-based model is where the financial advisor earns a commission based on the sales of financial products. This means their compensation is tied directly to the revenue generated for their brokerage, typically as a percentage of sales. This can create potential conflicts of interest since an advisor might prioritize higher-commission products over those that are actually better suited for their clients.
**Interviewer:** That sounds risky for investors. What about the fee-based model?
**Expert:** In the fee-based model, advisors charge a fixed fee for their services. This fee is often calculated as an annual percentage of the assets they manage for their clients. The key advantage here is that the advisor’s revenue doesn’t depend on the specific products they recommend; therefore, they have a stronger incentive to act in their clients’ best interests by suggesting products that align more closely with the clients’ financial goals.
**Interviewer:** I imagine that transparency plays a significant role in these models, especially since you mentioned potential conflicts of interest.
**Expert:** Exactly! Transparency is crucial. In many places, including the UK, the commission-based model has been outlawed to reduce conflicts of interest. Financial advisors must now be directly compensated by their clients, ensuring that the advice given is impartial and primarily aimed at benefiting the client. In Brazil, the fee-based model has been well-received, particularly in private banking for high-net-worth clients.
**Interviewer:** It seems like the shift towards fee-based advising is beneficial for investors. But I’ve heard some skepticism about fee-based advice being ‘free’ in some contexts. Can you shed some light on that?
**Expert:** That skepticism stems from the idea of “free investment advice.” While it may appear that some advisors offer services at no cost, the reality is often that their compensation is hidden within commissions or fees charged for specific financial products. The statement “if you are not paying for a product, you are the product” holds true in many cases, and it is crucial for investors to understand that there’s usually a cost involved, whether direct or indirect.
**Interviewer:** With recent regulatory changes aimed at increasing transparency, what are some of the mandatory disclosures required of financial advisors?
**Expert:** Under regulations like the CVM Resolution 179 in Brazil, financial advisors must disclose comprehensive information about their remuneration structures and any potential conflicts of interest on their websites. They are also obligated to provide quarterly statements to clients detailing the compensation they’ve earned from the products recommended or investments made. This move is designed to illuminate the myth of ‘free’ advice and hold advisors accountable for their recommendations.
**Interviewer:** it seems the fee-based and transparent approach could potentially safeguard investors better. Are there any final thoughts you would like to share?
**Expert:** Yes, I’d encourage investors to seek out advisors who utilize a fee-based model, as this structure often aligns more closely with their financial goals. Always request clarity on how your advisor is compensated, and don’t hesitate to ask about conflicts of interest. Making informed decisions can significantly impact your investment success.
**Interviewer:** Thank you for your insights! This will surely help many investors navigate their options more wisely.
