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 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 conflicts of interest associated with commission-based compensation models in financial advising?
**Interview with Financial Advisor Expert on Commission-Based vs. Fee-Based Compensation Models**
**Interviewer:** Good afternoon, and thank you for joining us today! With the recent changes in financial advisory regulations and the ongoing debate around commission-based versus fee-based compensation models, there’s a lot to unpack. Let’s dive right in.
**Expert:** Thank you for having me! It’s a crucial topic for anyone considering investment advice.
**Interviewer:** To start, could you explain the key differences between commission-based and fee-based models in investment advising?
**Expert:** Absolutely. In a commission-based model, advisors earn a percentage of the sales they generate, such as commissions from financial products they sell. This can create a conflict of interest, as advisors might be incentivized to recommend products that earn them a higher commission rather than what’s best for the client.
In contrast, a fee-based model charges clients a fixed fee, usually as a percentage of assets under management. This structure aligns the advisor’s interests with those of the client, as they benefit when the client’s investments grow, regardless of the specific products they choose.
**Interviewer:** That makes sense. You mentioned potential conflicts of interest with commission-based models. How significant is this risk for investors?
**Expert:** It can be quite significant. For example, if an advisor can earn a 3% commission on a particular structured product, but only 0.2% on a suitable investment for the client, they might prioritize the higher-commission product. This lack of transparency can lead to poor investment decisions that don’t serve the investor’s best interests.
**Interviewer:** Interesting perspective! Recently, the CVM Resolution 179 in Brazil brought about changes regarding the transparency of advisor remuneration. How does this impact investors?
**Expert:** This resolution mandates that financial advisors disclose their remuneration structures and any potential conflicts of interest. It requires quarterly statements detailing how much the advisor earns from the client’s investments. This move aims to educate investors that “free” investment advice may come with hidden costs, often funded through commissions tucked into the products they recommend.
**Interviewer:** It sounds like progress is being made towards greater transparency. How have financial advisors reacted to these changes?
**Expert:** There has been pushback from some within the industry, as many advisors previously promoted themselves as providing free advice. The requirement for transparency reveals that such advice often carries hidden costs. Despite the resistance, this push for accountability will ultimately benefit investors by helping them make better-informed decisions.
**Interviewer:** What would you say to someone who asks, “Why should I pay for advice when so much is available for free?”
**Expert:** That’s a valid question! However, the saying “if you’re not paying for the product, you are the product” holds true, especially in financial services. Free advice often translates to commission-driven recommendations, which may not align with your financial goals. Opting for fee-based services may involve a direct cost, but it ensures that your advisor’s incentives align with your interests.
**Interviewer:** Thank you for your insights today! It’s clear that navigating these compensation models is critical for investors seeking trustworthy financial advice.
**Expert:** Thank you for having me! I hope this helps illuminate the topic for your audience. Understanding how advisors are paid can empower investors to make informed choices.
