The point: If you financial advisor is giving you a financial plan for “free”, what’s his incentive for doing it well?

These days, we all want to believe that we’re savvy consumers. We scoff at TV commercials for products that are worth hundreds of dollars but can be yours – for a limited time, mind you – for the low, low price of $19.99 (plus an unspecified amount of shipping and handling), and they’ll throw in two extra sets for FREE!

“Ah-hah!” We say to ourselves as we sit on the couch, “We are not dumb. We know that the crazy little loud man is creating a perceived value for a product that has little intrinsic worth. We know that the real money is in shipping and handling. We will not fall for dat.”

Believing ourselves to be Too Smart for that kind of marketing, we fancy ourselves willing and active participants in mutually beneficial transactions: we buy the cereal that comes with a free t-shirt because we were going to buy cereal anyway.

If companies have to “lose a fly to catch a trout”, well – these days – they’re dealing with some pretty cynical trout who think they’re too smart to ever get caught.

 

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Except we’re just as susceptible to delicious flies as the trout who went before us…

If companies couldn’t make money by offering products and services with a perceived value for free or below cost in order to entice consumers to buy the profitably priced companion product or service, they would have stopped doing it. Using a loss leader as a marketing and sales strategy has been around for more than a hundred years, and isn’t going to disappear anytime soon.

The cereal company doesn’t care about the quality of the t-shirt that they give away when you buy a box of cereal. They care about the fact that the t-shirt costs less than pennies to make, has a perceived value, and will cause unthinking shoppers to buy cereal (or more cereal, or a different brand of cereal) that they didn’t need, because they were getting the t-shirt for free.

Did you know that when you work with a financial advisor that also sells financial products that your plan – the analysis of your current situation, the recommended action steps to change it for the better, and the forecasts that show the best and worst case scenarios if you do (or don’t) take action – is a loss leader?

The fact that the fund companies are the ones compensating your advisor for the time he took to build a plan for you should tell you a lot about the value of that plan. Actually – having seen some of the “plans” that come from these advisors when I talk to clients who’ve been burned – the quality of the plan itself should tell you a lot about the value of the plan.

Banks and mutual fund salesmen love to trumpet the planning side of what they do. They talk about it like it’s a public service; that the financial health of every consumer in Canada is so important to them that they’ll give freely of their time and resources to create personalized, tailor-made plans for everyone they meet.

In reality, of course, they make their money when you buy the mutual funds from them, and – surprise! – the result of their analysis is that your financial health would be, well, healthier if you transferred your life savings into whatever mutual funds they’re selling that day.

And, more often than not, you bite.

You bite because you feel a moral debt to this person who just spent an hour filling out financial health check questionnaires and risk profiles with you. You bite because the plan that their computer spit out has charts, and forecasts that you’re told are pretty conservative, and it’s only a week or so after you leave the office, having made the recommended changes to your portfolio and signed the transfer documents, that you realize all you have in your hands is a one-size-fits-all, standardized by age and family situation checklist of products to buy, not a roadmap to healthy finances.

If they spend little enough time on the plan that they can afford to give it away, how much are they earning on the products you’re being encouraged to buy at full price?

I guarantee you that the financial plan you’re getting for free from the personal banker and the investment advisor isn’t really a financial plan tailored to you at all, and it’s free because the full priced products – through up front and annual trailing commissions¬† – are huge profit engines for the people and companies who sell them.

A classic loss leader.

 

 

 

Sandi Martin

Co-Founder, Financial Planner at Spring Financial Planning
Fee only financial planner. Former banker. Money nerd. Curmudgeon only on days that end in "-day"

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