von Dr. Nikolaus Braun
I remember well how challenging it was when we started fee-based advising in Munich 14 years ago. It was tough to explain to people the difference between selling products and genuine financial advising. Even intelligent and savvy private investors failed to see such an obvious fact as the conflict of interest between the bank and the customer. It often took an entire conversation to make someone understand that a bank "adviser" is not a real adviser. They are paid to sell (often proprietary) products, generating commissions for the bank. A product seller is not an adviser.
With the shock of the financial crisis, things began to change: Critical articles condemning poor bank advising were appearing in the press every week. The so-called "Lehman Grandma" who just wanted a better interest rate for her savings and ended up losing everything, became a symbol of an overall toxic financial industry. At that time, my colleagues and I were gaining new clients every week. We were highly motivated and saw ourselves as the good guys.
Fee-Based Advising doesn't solve all problems
When emotions take over, reason often takes a back seat. We overlooked that while overcoming misincentives in financial advising is essential for good counseling, it certainly doesn't solve all the problems. In essence, I still thought like a product seller: I picked the products and ideas promising the best returns for my clients, aligning them with their risk preference. Fee-based advising was initially nothing more than a fairer, more transparent, and affordable pricing model. Our motives and selection criteria were more honorable than those of commission hunters, but the portfolios mainly reflected our diverse investment ideas, not our clients' life situations.
Good Fee-Based Advisers focus on people, not markets
Truly relevant fee-based advising has a different starting point. It focuses on the few key issues that an adviser can control – the future course of capital markets is not among them. The pivot is the client's life plan, their dreams, goals, and fears. Specifically: Why is money important to you? How can money improve your quality of life? What must never happen? To provide this advice, a fee-based adviser must not only understand the client's values but also identify with them. That's the only way to prevent clients from making rash decisions in turbulent market situations.
Only those who understand the values and the story of their client can create an appropriate risk profile and find a suitable scientifically-based portfolio. This requires clean craftsmanship, not art. The individual product almost doesn't matter in the end. It's a means to an end, often interchangeable, as long as it meets the following criteria: low costs, accurate representation of the desired asset class, transparency, special assets...
Relevant advising must continuously evolve conceptually
It took years for my mindset to change completely, and I'm optimistic that this process is not yet finished. Is it acceptable to take responsibility for people's wealth without ensuring that there's a will, a power of attorney, or an advanced healthcare directive? Can fee-based advisers ignore their clients' ethical investment implications or philanthropic engagements? Is it appropriate for a financial adviser to inquire about a client's health - or is it perhaps even necessary?
Fee-Based Advising is not a pricing model, it's a stance
Fee-based advising, in this sense, is more than just a fair pricing model. It's a way of thinking, and ultimately a significant competitive advantage. It makes financial advising relevant to clients' lives. In an era where differences seem to blur and traditional banks go to greater lengths to obscure conflicts of interest, it's more important than ever to have a clear stance.
Best wishes,
Nikolaus Braun
Forty-Nine Fee-Only Advisors
PS: Please feel free to send any questions, criticism or comments to nachdenken@neunundvierzig.com
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