Buy cheap, buy twice’

‘You get what you pay for’

‘What’s the catch?”

Our language is full of little homilies that guide us to the basic truth. TINSTAAFL

Even children understand this. We are rightly cynical about any form of ‘Free’ goods.

And that is a good thing. It’s how economies work – Adam Smiths classic ‘Dead Hand’.

Henry Ford understood it in the 1920’s when he encouraged other business owners to pay their workers more so they could more easily afford his cars. It’s why capitalism works, and utopia’s do not.

What is all this about?

In the new world of the world of the internet, things are often ‘Free’. Facebook. Twitter. Skype. The list goes on.

But how can that be? How does ‘Free’ work?

The clue is the quote we saw about Facebook, during one of the many privacy conversations last year. The quote was:

‘If its free, you are not the customer, you are the product’.

In other words, Facebook is not a free social media site. It is actually an advertising and data gathering machine with a shiny, often useful, front end to attract us to continue to play with it and thus generate data.

This is not to pick on Facebook – a very useful site when you have scattered friends and family – but it does serve to flag up the underlying issues.

So how does this apply to the world of Advice and Financial Planning?

A cynic may say that ‘fee’ advice is not worth the paper it is – often not – written on! And it would be easy to agree with that. But its why that is the case that is important.

We think the key issues are:

  • Free advice is pretty much always tied to buying a product that the person who is ‘advising’ you has a direct interest in – so is often heavily conflicted. After all, as with Facebook, the ‘Free advice’ has to be paid for somewhere by someone.
  • It follows that as the advice is about the product or fund, and not about you – how can it be? – then even if we are happy to accept the conflicts involved – think Facebook again – then it is unlikely that the advice is tailored to your circumstances. How could it be, and why should it be?

Of course, as Fee Only Financial Planners, we have a direct interest in making the above arguments. We are conflicted here as well!

But the evidence tends to on our side. The worst advice given to the public – PPI, Penny Shares, ‘Exotic’ funds – all tended to be supported by ‘Free’ advice.

Of course, fee advice can go wrong. That is the case in any professional relationship.

But with paid for advice, the duty of care is clear, and there will be proper processes in place to deal with issues and protect clients interests. That may well not be true of free advice.

Of course, there is a different sort of ‘Free’ as well. We know it better as Do It Yourself – DIY.

The weekend newspapers regularly proclaim that there is no need to pay a professional – just DIY!

And they have a point. There is always a case study of a couple who did their own conveyancing, saving £500 or so. And the internet has allowed many of us to be our own Travel Agents and car insurance brokers, so there is a real point here.

But to be successful at DIY requires three resources:

  1. A more than basic level of skill or knowledge
  1. The time to acquire and apply that skill and knowledge
  1. The capacity to absorb losses and costs incurred through making mistakes – buying the wrong part or paint, as it were.

For many clients, the reality is that a bit of both is comfortable. Get a professional in for the big and critical stuff – painting the house, running the family portfolio – and have a go at the less critical stuff themselves – putting up pictures, having a bit of a flutter on the side.

Life is rarely simple, and there is a place for the new technology – we are back to ‘Free’ Facebook. But we need to remember – TINSTAAFL!

PS: TINSTAAFL = There Is No Such Thing As A Free Lunch