Financial Advisor v/s Agent

Disclaimer: The intention of this article is not to hurt anybody’s feeling or profession. It is purely a comparison of two different professions based on my personal experience.

While delivering sessions on Financial Planning I always came across common question. What is the difference between buying financial products from agents and advisors? Also, many people show interest in doing planning but when they are asked to pay upfront fees, they are bit hesitant and assume other people / company is providing service for free of cost why should we pay fees to “Advisors”? In this world nothing comes for free; instead someone charge you for service and others make money by indirect ways. To be honest indirect way of fees is too high compared to direct fees. So, I thought why not to write article on this and explain how this both professions make money from clients.

A financial advisor or an agent may sell similar products to you, but they can have different objectives. Agents will be obliged to their company’s profit margin and self-commission more than to client’s financial well-being.

There is a clear distinction between the two professions. Let’s understand who does what:

  • The financial advisor has more comprehensive view of client’s situation and is tasked to help the client to achieve financial goals by proper planning; that includes one or more defined financial goals, risk mitigation plan and recommends products which are more suitable based on individuals’ risk
  • Whereas an agent has single point agenda; to sell the product which is more beneficial for his/her company and earn more commission for self. They are more focused on finding a need that their financial product can address

Understand Agent v/s Advisory Business Model

Both agents and advisors exist in market, but unfortunately, there is very small percentage of the certified “financial advisors” are available who ask for direct fees for financial planning. Fee-only advisors charge only for your financial planning i.e. to YOU. Whereas, financial agents sell products to you for which they get compensation by their employer. Their pay structure isn’t necessarily based on the services to you but more on the financial products they sell to you for a commission.

Sometimes this imbalance is so extreme that you lose money on your investments. Agents plainly took advantage of clients and had been sold several annuities and high commission loaded funds that, even in an up-market, were not returning enough or in some cases the investments are in negative even after 2 -3 years. Please try to understand who is better for your financial goals to be achieved. I urge you to seek out fee-only advisors and not agents.

Here are two PERSPECTIVES and key differences between an Agent v/s Advisor:

  1. “Advisor helps you to achieve your goals and provides end to end financial planning with proper risk mitigation.”
  2. “Agent lacks the knowledge of border spectrum of financial products and sell those products which are more beneficial for them and company they work / associated for as an agent”

Here are few examples of products suggested by Agent vs Advisor:

Product NameAgentAdvisor
Endowment Insurance PoliciesWill try to push those products so hard, for which they get good 30-40%of commission on selling them in first year and 2 to 3.5% commission thereafter till client pays the premiumWill never suggest such products as they are financially not good for client, as these products cannot even beat inflation
ULIPAgent will try to sell ULIP instead of Equity based products like Mutual funds as it provides more commission compared to other equity-based productsWill never suggest such products as there are many other products in similar investment category which can give better returns
Equity Mutual FundsWill always suggest to buy “regular plans” or “NFO” (new fund offer) as they get more commission if they sell Regular plan of mutual funds and NFO productsAlways suggest to buy “Direct Plans” only and will never suggest to buy “regular plan” or “NFO” (will suggest NFO only if it is very unique and no similar product is available in the market)
Property InsuranceWill recommend to buy insurance for the total cost of flat / house value to earn more commissionWill advise to buy only up to the cost of construction as they are aware land will remain in same condition in all types of risk like Earth quake, tsunami or fire, so insurance for land is not required which can save approx 70% of premium
Term InsuranceWill advice to buy offline products to get better service, so that in turn they get good commissionWill advice to buy online Term Insurance directly from the portal of respective Insurance company which can save almost 50% of premium

Here are few examples how much money we lose if invest based on suggestion of an Agent V/s an Advisor (Assumption is 5000 Rs per Month in below mentioned two products)

Product NameAgentAdvisor
Endowment Insurance PoliciesAfter 20 years we may get only 17 to 20 Lakhs (based on tax bracket) and Insurance coverage of 10 LakhsWill suggest online Term Insurance worth of 50 Lakhs and rest money to be invested in balance funds that will give close to 30 to 35 Lakhs (assuming 10% returns)
Mutual FundsWill suggest Regular plan of Mutual funds (5000 SIP for 25 years will become 1.17 CR (Assuming 15% CAGR))Will suggest Direct plan of Mutual funds (5000 SIP for 25 years will become 1.4 CR(Assuming same 15% CAGR))

Moral of the story is agent will say I don’t take even single penny from you for the service and he is taking out 40 Lakhs from you indirectly in the form of commission from just 2 products for self & company they are associated with.

Let us assume, an Advisor is taking direct fees from us as up front which is approx. 5K per Annum, still we end up paying only 1.25 Lakhs for 25 years (Even it is inflation adjusted fee which may increase over the years still it will not be more than 3 Lakhs, I hope it is simple to understand with 10K investment might have been by excess of 35 to 40 Lakhs after 25 years  if invested based on Advisor’s recommendation)

Note The above illustration is for only 10K investments per month (5K in Insurance and 5K in Mutual funds). If we plan to save more than 10K per month, then check what potential loss we will have. But, advisor fees will remain same 5K per annum even if our investments increases (Advisor charges are per annum and not per product suggested)

Personal Experience : Do you know most of Financial Planners come to Industry to become good Advisors and help their respective clients in planning. But, when client is not willing to pay direct fees, they are indirectly forced to become agents to fulfil their financial need. Think once, if you want best salary to be paid by your employer, why a financial Advisor cannot expect the same? If we don’t pay directly they will find alternatives to take more from us. Agent who comes to your home / office to collect documents and recommend you best products and don’t charge you. Why? In my case, my agent used to get even chocolates for my son and sweet box on Diwali, which made me think. Now, you think you will have similar experience and ended up buying wrong products.

“Nothing comes for Free of cost. Honesty is very rare quality, don’t expect it from all.”

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