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 accept 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 part 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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What are the hidden costs associated with ‘free’ investment advice that investors should be aware of?
**Interview with Financial Expert Maria Gonzales on the Issue of ‘Free’ Investment Advice**
**Editor:** Good afternoon, Maria. Thank you for joining us today to discuss a pressing issue in the investment advisory space. A lot of people wonder why they should pay for investment advice when there is seemingly free advice available. What’s your take on this?
**Maria Gonzales:** Good afternoon! This is indeed a common question. The idea behind “if you’re not paying for a product, you are the product” is particularly relevant here. Many advisors who promote free investment advice are often compensated through commissions or other indirect fees. This can create a conflict of interest, where advisors might recommend products that benefit them financially instead of truly serving the client’s best interests.
**Editor:** That’s an interesting point. Recently, we saw significant changes with CVM Resolution 179, which emphasizes transparency about remuneration in investment advisory services. How do you think this will impact the perception of ‘free’ advice?
**Maria Gonzales:** CVM Resolution 179 is a crucial step towards transparency. It mandates that advisors disclose how they make money and any conflicts of interest, which is a game changer. This means that investors will have clarity on the true cost of their advice. The idea of ‘free investment advice’ will be challenged, as clients will see the hidden costs more explicitly, leading to more informed decisions.
**Editor:** Resistance to change has been noted from certain sectors. Why do you think some advisors are hesitant to embrace this new transparency requirement?
**Maria Gonzales:** Many professionals fear that revealing their remuneration structure will deter clients. There’s a long-standing tradition within the industry of maintaining the status quo where ‘free advice’ seems appealing on the surface. They might also worry that clients will realize the potential downsides and seek alternatives, which could impact their earnings. However, in the long term, transparency will likely build trust and lead to better client relationships.
**Editor:** Speaking of trust, could you explain the difference between commission-based and fee-based models, and how this ties into the idea of ‘free’ advice?
**Maria Gonzales:** Absolutely. In a commission-based model, advisors earn a commission on the products they sell, which can incentivize them to recommend products that are more profitable for them rather than what’s in the best interest of the client. In contrast, a fee-based model charges clients a fixed fee, often based on assets under management, ensuring that advisors are agnostic regarding which products they recommend. This often leads to better alignment of interests between advisors and clients, fostering trust and ultimately benefiting investment outcomes.
**Editor:** It sounds like the fee-based model addresses many of the pitfalls associated with ‘free’ advice. Can you share how Warren is navigating this landscape with their approach?
**Maria Gonzales:** Warren has embraced a fee-based remuneration model from the start, prioritizing transparency and putting the client at the center of the financial experience. By avoiding conflicts of interest, they create a more trustworthy environment for investors, helping them to make informed decisions about their financial futures without the uncertainty that often accompanies ‘free’ advice.
**Editor:** Thank you, Maria. This conversation sheds crucial light on why understanding the costs of investment advice is so essential for investors today. It seems clear that nothing is truly free—especially in the world of financial advice.
**Maria Gonzales:** Exactly. Awareness and education are key. If investors can recognize the true costs of the advice they receive, they can make better choices and ultimately, achieve their financial goals more effectively. Thank you for having me!
