The Dark Side of Free Financial Advice

Big disclaimer right up front: this post is riddled with bias.

I earn a living by charging people for financial advice. The one-on-one work I do with clients, the DIY online course, and the books I sell all cost money.

So when I write something titled The Dark Side of Free Financial Advice, there’s clearly a bias there. Because to some extent my business is competing against the idea that you can get the same kind of advice elsewhere for free.

But I’m not writing this to get more business. I’m really not.

I’m writing this because you deserve to be an informed consumer. You deserve to understand what you’re paying for the financial advice you get, even when the cost isn’t made clear to you up front.

You deserve to understand the incentives that people have for the recommendations they make.

You deserve to know because these things have a significant impact on your ability to reach your personal financial goals.

So, here are some ways you’re paying for financial advice, particularly from financial advisors and bloggers, even when it seems like the advice is free. None of these things are inherently bad. They’re just important to keep in mind as you make your decisions.

How you pay financial advisors

Financial advisors all have different ways of charging for their services. Sometimes the cost is clear up front and sometimes it isn’t.

When it isn’t, there’s often the appearance that you’re getting free financial planning. You go in, talk to the guy, get his recommendations, put them in place, and go on your way without ever paying him a dime.

But that’s not exactly how it works. You are always paying for the advice in one form or another. After all, they have to make a living too, right?

Here are a couple of ways you might be paying your financial advisor, even when the advice seems free.

1. Commissions

Many advisors work on commission. They provide you with a plan for free, but they get a cut when you buy the investments or insurance they recommend.

This has a few implications for you.

With investments in particular, the advisor’s commission is coming straight out of the money you’re saving. In other words, you’re saving less than you think because some of your savings is going to the advisor instead of your investment account. And since your savings rate is the most important part of your investment plan, this is a big deal.

It also means that the advisor has a financial incentive to recommend certain products over others because they pay a higher commission. In fact, many financial products don’t offer a commission at all (like most index funds), which means that if the advisor wants to make a living they simply can’t recommend those products.

So in this case there’s both a direct cost to you in the form of a commission and an indirect cost in that your advisor may be limited in what he can recommend and/or may make recommendations based on his own financial incentive rather than your best interest.

2. Management fees

Many investments are sold without a commission (good news!), but they do come with an ongoing management fee. And that can influence the recommendations you get.

For example, let’s say you go into your local Fidelity branch and ask for help opening a Roth IRA. When you make your first investment, which mutual funds do you think the representative will recommend? Probably funds run by Fidelity, right?

Well of course! Fidelity charges an ongoing management fee when you invest in their mutual funds, just like every other investment company. So it’s good business to recommend their own funds.

Here’s another example.

Let’s say you check out one of the new automated investment platforms, like Betterment, and enter some information about your situation and your goals. What do you think they will recommend?

Will they ever suggest that you pay down your mortgage? Or accelerate your student loan payments?

No! Every time they will recommend investing in one of their pre-built portfolios. And why is that? Because they make money managing investments! The more you invest with them, the more profitable they are.

Again, this isn’t inherently bad. And this isn’t meant to vilify Fidelity or Betterment. I actually generally like both companies.

It’s just important to understand that they aren’t giving their advice away for free. There’s always a cost involved.

How you pay bloggers

I love that the internet has made it easier than ever for people to share their point of view, share their story, and connect with each other.

I genuinely think that this makes the world a better place. Or at least it has the potential to. I personally get a lot of enjoyment from the blogs I read and learn a lot in the process.

But it comes with a dark side too. Because the reality is that anyone can create a website and start giving advice. There are no qualifications or requirements needed, other than a few dollars and a few minutes to get up and running.

Add that to all the “make money online!” pitches you see all over the place and you get a lot of people creating websites with the goal of making themselves a quick buck rather than giving objective advice.

Here are a few ways in which you pay for the free financial advice you find online.

1. Affiliate sales

There’s a reason you see so many glowing reviews of the same financial companies all over the internet. There’s money involved.

Most of the time when you read a product review or see a recommendation for a specific company or service, the person who wrote that review or recommendation gets a commission every time someone clicks their link and signs up for the product or service.

Now, you typically don’t pay extra for this. In fact, there’s often a discount or free trial involved.

But the commission creates a conflict of interest. Is the writer recommending the product because they genuinely think it’s the best one or because it offers a significant payout for referrals?

Having been behind the scenes, I’ve seen first-hand that the companies offering the biggest commissions typically get the largest number of recommendations.

This kind of relationship is common with credit cards, bank accounts, investment platforms, student loan refinancing services, and many of the other financial products and services you see reviewed and recommended online.

So be wary when you see someone recommending a particular financial tool. It may be great, but it’s almost certainly being paid for.

2. Products and services

Many bloggers (myself included) have a product or service they sell and the blog serves, at least in part, as a way to market it.

Now, this isn’t inherently a bad thing. Speaking from both my personal perspective (bias alert!) and my experience with many good-hearted entrepreneurs, this approach can be used to do a lot of good:

1. When the free material is genuinely valuable all on its own, even people who never pay a dime will benefit.
2. When the product or service is genuinely valuable as well, and isn’t constantly being pushed, it gives people an opportunity to get something they need.

But again, free isn’t really free. Free is access to your attention, access to your inbox, and the opportunity to put a paid product or service in front of you.

3. Advertisements

This is a bigger deal with bigger publications, but the truth is that much of the internet is still dominated by advertisements. And the basic rule of advertising is that the more views and clicks you generate, the more money you make.

Which means that much of the financial content produced online is primarily meant to get eyeballs on the page. Catchy headlines, controversial topics, and strong opinions lead to bigger profits than well-reasoned, balanced advice.

And the cost to you comes from the decisions you make based on something that appears to be financial advice but is primarily meant to be entertainment.

There’s no such thing as free financial advice

In the end, this is about you having all the information you need to make the right financial decisions for you and your family.

What and how you pay for financial advice matters, because it affects the recommendations you receive.

In some cases, advice that seems free may in fact come with a number of hidden costs that make it harder to reach your financial goals.

In other cases, the advice you get may be swayed by the financial incentives of the person giving it, leaving you with a less-than-optimal solution.

No particular approach is inherently better or worse than any other. They can all be done well and they call all be done poorly.

But the more you understand about how these things work, the easier it will be to make good choices for yourself.