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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Free Financial Advice Is Very (Very) Costly Indeed

Many banks, finance companies and even individual financial advisors provide "free" advice on your personal finance and investments.

They are ever ready to conduct free seminars or even personally visit you and offer their "expert opinion" — without any fees — on how you should invest your money; or borrow a loan; or apply for a credit card; etc.

Beware! Listening to them could turn out to be an extremely risky and expensive proposition for your personal finances.


Simply because (in most cases) they are not philanthropists. They are not here to do good and just forget about it.

You need to appreciate the fact that they are either working in a company / bank or running a business. So they have their targets. They have to make money. Surely you don't expect them to make losses. After all, they too have to earn their bread and butter!

Will you work for nothing? Will you share your expertise without any compensation? How will you survive without money? How will you feed your family? How you will your educate your children? Think!

If that be so, how do they make profits by giving free advice?

The answer is simple... COMMISSION.

When they give you free investment advice, they will ask you to invest through them. This earns them commission from the post office, bank, insurance company, mutual fund, broker, NBFC or any such entity whose investment / financial product they are selling.

In other words, they are sellers, agents or distributors of financial products. The free advice that they give is part of their marketing strategy and the commission earned thereof is their source of income.

There's nothing wrong with this business model per se. It is quite useful and completely legitimate.

However, there are a few aspects here that you should be aware of.

Let's discuss these so that you are not under any wrong impression or make a blunder with your investments.

Firstly, the commission paid to them is ultimately recovered from you. So, what may appear to be a free advice, is actually not free. You are indirectly paying for the advice and services offered by these agents or distributors. As they say 'There is no such thing as free lunch'.

That's lesson number 1 - You are NOT receiving any free financial advice. There is (almost) always a cost attached to it.

Will you work for nothing? So how can you expect others to do so? Think!

Again, nothing wrong per se if the agents and distributors earn money for their efforts in servicing your investment needs. They are doing certain work and should definitely be paid for it. I repeat... why should they do it for free?

Which brings us to the second issue... CONFLICT OF INTEREST.

Different investment products offer different commissions. Different companies have different commission structure. It is tempting — and naturally so — for the agent / distributor to sell the product where his/her commission is more. Anyone would like to maximize his/her income. This is a simple fact of life.

This, unfortunately, is bad for you. Because, your returns are directly affected.

Actually it's simple mathematics. Equity will generally deliver around 14-15% p.a. returns and debt around 7-8% p.a. Hence, higher the commission deducted from these gross returns, lower is the effective returns that you get in hand.

That's lesson number 2... what is good for the agent / distributor is bad for you and vice versa.

No advice is free. And commissions eat into your returns.

It is, however, very important to remember that all this holds true even when everything about the transaction is genuine and honest.

Because, apart from the natural tendency to work for their own interest, there are many unscrupulous elements around who will deliberately and knowingly sell you dud investments.

Their objective is plain and simple... FRAUD.

And since they don't intend to return your money — forget about the promise of HIGH returns  they are at their best behaviour. They will not charge you any money. On the contrary, they will lure you with free gifts and offers. They are so good that you simply can't help but believe in them completely and wholeheartedly.

Every day we keep hearing instances of scams and mis-selling. Even the so-called "trusted" bankers have been guilty of such wrongful practices, where their customers have had to pay a very heavy price.

Hence, you must always (always) cross check all such free financial advice with independent sources. It's always (always) advisable to take a second opinion.

Don't take any promises at face value.

That's lesson number 3 - Verify. Verify. Verify. 

These are really (really) important financial lessons.

If you ignore these lessons, you are only fooling yourself.

To reiterate
- No financial advice comes to you free. There is (almost) always a cost attached to it.
- More commission, less returns. Less commission, more returns.
- Frauds are common (very common). So don't trust anyone. DO YOU OWN RESEARCH.

Please do take good care of your money... no one else will do it for you.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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