How "Free" Financial Advice Usually Comes At A Cost

This post originally appeared in Forbes as part of its Intelligent Investor series. For the original version of the post, please click here.

What kind of financial planning services do you get when you add a monthly subscription model, and subtract time spent getting to know clients? Online brokerage platforms, are now hitting the marketplace, and clients may not fully understand what they’re getting — and what they’re not.

At first glance, these new services may seem more affordable than the traditional professional advisor fee, which averages 1% of your portfolio. One online brokerage firm, for example, has a $300 enrollment fee and a $30 per month advisory charge after that. Sounds reasonable, but on a $25,000 account, that first year would cost 2.6% of portfolio assets — almost three times the cost of a typical advisor. Those numbers are even more bleak when you consider that at some firms a minimum account size of $5,000, would bump advisory costs up to 13%. In other words, margins on this program are nothing to sneeze at, so it’s no wonder that other companies are expected to roll out new robo-advising and subscription-model investing offerings in the coming years. Fidelity now has a commission-free ETFs program, and Vanguard has long followed Schwab’s lead when it comes to innovation in the space.

To play devil’s advocate, let’s assume people go into these programs with eyes wide open as to the costs associated. Perhaps the allure, then, is the convenience factor. An algorithm (with an occasional assist from a human) decides what you should be invested in, and makes it happen. You never have to leave the comfort of your home, drive across town to meet an advisor face-to-face, or confront possibly uncomfortable questions about your life’s big money goals. You simply pay your monthly financial planning fee along with your Netflix and Spotify subscriptions and call it a day.

In this way, the world of robo advising and Millennials go hand in hand. Millennials were raised on technology, and generally want things quick and dirty, with free overnight delivery and a handy online chat feature. They’re also more likely to believe that they don’t have enough money or time to warrant the attention and interest of a human advisor. Unfortunately, that couldn’t be further from the truth. Many advisors have no minimum asset requirement for new clients, and there’s no online questionnaire or algorithm that can replace knowing what makes an individual tick.

But of course it’s not the changing desires of the next generation of investors that’s the problem here. The greatest cause for alarm in the robo-advisor world is that you can never be quite sure who you’re getting on the phone (if you can get someone on the phone) — and many of these advisors may not have your best interest at heart. Registered investment advisors like myself — and all other Certified Financial Planners — must always act as their clients’ fiduciary, which means that every single piece of advice we offer, or change we make to a portfolio must be in our clients’ best financial interest.

You need to ask yourself one question: How does the advisor get paid? If they are paid by the company, then the guidance you’re getting could be stacked according to company incentives to move people into proprietary products, and in the absence of a fiduciary standard, it’s all perfectly legal for a firm to recommend its own funds. In other words, your robo-advisor may know the answers to your questions before you even ask them because they’re reading from a script. In this way, going to a robo-advisor with your financial question is a lot like taking to the internet to ask a question — you’re never really sure of the agendas behind the answers. You have to ask yourself: Do I want to be advised by someone paid to help a company bring in business, or do I want to be advised by someone paid to help me retire comfortably?

So, what is Wall Street’s end goal here? I’ve spent a lot of time thinking about that question lately, and with so much financial advice now branded as “free,” or “included with your monthly subscription” it seems the aim is to turn the personal financial advice business into a commodity business — one that competes solely based on price, not on the intrinsic value of its service. Obviously, this is a problem. To imagine something similar in other industries, picture patients expecting free brain surgery being thrown in when they pay for a night in the hospital; that may sound great at first glance, but would you really trust the surgeon? My point is this: Commoditizing a relationship business will no doubt have great costs in the long run.

My hope is that as the public begins to hear about more programs and subscriptions with “free” financial advice, their first response won’t be, “What a great deal,” but instead, “It can’t be that good.” You’re investing for the attainment of your most precious life goals, and this is not something you want to mess around with.

Yes, technology is great, and subscription services can be wonderful, but there’s a cost to not having a trusted financial advisor in your corner when you need it, and there’s a cost to unknowingly being advised by a person (or a computer) with an agenda. A reputable advisor will always have you as their first priority, and will always be working in your best interest—and you shouldn’t want that to be free.