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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What are the potential risks associated with relying on free investment advice?
**Interview with Financial Expert on the Hidden Costs of “Free” Investment Advice**
**Editor:** Today, we are joined by Maria Silva, a financial analyst and expert in investment advisory services. We’re here to discuss the implications of “free” investment advice and the recent changes brought by the CVM Resolution 179, which impacts financial transparency in investment services. Thank you for joining us, Maria.
**Maria Silva:** Thank you for having me. It’s a pleasure to discuss this crucial topic.
**Editor:** To start, many people question why they should pay for investment advice that appears to be offered for free. What’s your take on this perception?
**Maria Silva:** The phrase “if you’re not paying for a product, you are the product” rings particularly true in the finance world. When advice is marketed as free, it often means that the advisor is compensated in ways that are not immediately apparent to the investor—such as through commissions on recommended products.
**Editor:** So, with the CVM Resolution 179 taking effect, how will this change the landscape of investment advisory services in Brazil?
**Maria Silva:** The resolution mandates clear disclosures about remuneration and potential conflicts of interest. For example, advisors must detail their fees and provide quarterly statements to clients showing exactly how they are compensated. This transparency aims to dismantle the myth of “free” advice and empower investors to make informed decisions.
**Editor:** There seems to be some resistance from sectors within the industry. Why do you think that is?
**Maria Silva:** Yes, the pushback primarily stems from a reluctance to change practices that many have relied upon for years. Some professionals fear that acknowledging the costs associated with their services will deter clients. However, this resistance often overlooks the importance of transparency and trust in client-advisor relationships.
**Editor:** Could you explain the difference between commission-based and fee-based remuneration models?
**Maria Silva:** Absolutely. In a commission-based model, advisors earn a percentage from the products they sell, which can create a conflict of interest. They may recommend products that yield higher commissions rather than what best serves the client’s needs. In contrast, a fee-based model charges a fixed fee for advisory services, ensuring that all products generate the same revenue for the advisor, which aligns their interests with the client’s.
**Editor:** It sounds like the fee-based model is becoming increasingly favorable. How has this model been received in Brazil compared to other countries?
**Maria Silva:** In Brazil, the fee-based model is more common in private banking for high-net-worth individuals but is gaining traction in retail spaces, thanks in part to innovations by companies like Warren. Meanwhile, countries like the UK banned commission-based models in 2012 for similar reasons, promoting greater transparency and avoiding conflicts of interest.
**Editor:** Would you say that paying for investment advice can ultimately benefit investors despite the initial hesitation to spend money?
**Maria Silva:** Definitely. Investing in transparent, fee-based advice can lead to better long-term financial outcomes. While the upfront cost may seem daunting, it often pays off by aligning the advisor’s incentives with the client’s success, thus fostering a more trustworthy and productive relationship.
**Editor:** Thank you, Maria, for shedding light on this important topic. It’s crucial for investors to be aware of how they are being advised and the underlying costs associated with investment advice.
**Maria Silva:** Thank you for having me. I hope more people will start to understand the value of transparency in financial advisory services.
