Independent Financial Advisors Versus Tied Agents- Which One Is Right for Me?
A question I’d like you to play with is, “how much do I trust my financial advisor?”.
Is the trust enough for you to give them total responsibility on the handlings of a lifetime’s worth of wealth?
If you’ve been having doubts about this, that’s great. Always question everything. If not, then you definitely should be. One of the critical distinguishing factors that determine an advisor’s trustworthiness, is their professional affiliation, I.e., whether they are independent financial advisors or tied to a company.
Let me start by first explaining the difference between a tied agent and an independent financial advisor.
Who is a Tied Agent?
A tied agent is essentially someone who sells you products from one company. A lot of companies in Asia, some companies in the Indian subcontinent and some other parts of the world, operate in a manner where they only work with tied agents. This means that the company in question hires advisors to sell their products and services only.
The problem with that is they have access to only that one company’s products and services. So, they cannot really be fair in offering recommendations to clients because the only products and services available to them in their briefcase are essentially products and services sold by that one company. To assume that that one company has got the answer to every financial or life insurance-related problem is unrealistic. To assume that that one company is also most cost-efficient on all product classes is also unrealistic
Who is an Independent Financial Advisor?
Now let me talk to you about an independent financial advisor. This is someone who is associated with an open platform for products and services. It is usually a brokerage firm that has access to a host of different products and services from different companies spread across the international sphere. By having access to almost everything in the marketplace, the advisor would not be limiting his solution to a client. If a client has a specific requirement, the advisor is not dependent upon solicitation of one company’s products and services- he/she would be able to provide innumerable solutions that could be of the right fit to the client.
What It’s Like Working with a Tied Agent:
Let’s assume you’re in the market to buy a car and you have two ways of doing this. In the UAE we have agencies like Al Futtaim for Toyota, Jeep, Honda, Gargash Enterprises for Mercedes, Arabian Automobiles Company (AAC) for Nissan, and AGMC for BMW & Rolls Royce to name a few. You happen to go to AGMC which is a luxury car dealer that deals predominantly with BMW and Rolls-Royce.
Now, if you went to AGMC and told them you were in the market for a car, the only proposition they can put in front of you is BMW or Rolls-Royce. Regardless of whether BMW or Rolls-Royce is the actual right fit car for you, those are the only two options available to that individual to offer to you as a recommendation. Even within AGMC, the sales consultant for a Rolls-Royce is not the same consultant who can sell you a BMW. So, if you accidentally walk into Rolls-Royce and ask the consultant a question about BMW, they would simply brush the topic off. Their agenda would be to sell you the Rolls-Royce because there is no financial gain for them to be made in selling you a BMW. You might then end up purchasing something you don’t need and may end up paying a very high price point for something which is really not up to your alley.
Working with an Independent Advisor:
On the flip side, let’s assume that instead of going to an AGMC or BMW or Rolls-Royce, you go to a luxury car supermarket (there are actually a lot of these now by the way!) These car dealers sell their cars as used cars but in reality, these are not used. A lot of them are brand new with zero kilometers of mileage. The advantage in going here is you can find everything from Mercedes, to BMW to a Rolls-Royce, maybe even an $8 million Bugatti in there. What would happen here is they would identify what your needs and budget are and make a proposition for you keeping that in mind. It could mean purchasing a Rolls-Royce because it is the right fit for you, or the BMW, or maybe even a heavy-duty car like the Hummer or an SUV.
Similarly, the independent financial advisor has access to products and services from more than just one company. To expect a BMW to be a high-value, high luxury product that can take care of all your comfort, and at the same time also be able to take you to the desert off-roading is unrealistic.
For that reason, when you’re purchasing financial services products, you have got to be clear on what you need and whether you’re dealing with an independent or tied agency. In the past, especially for people from the Indian subcontinent or Asia, it has been common practice for them to deal with tied agents because marketing was always done based on the brand of that insurance company. But as time wears on, ten, fifteen, or twenty years later, they realize they put all their money into one product type.
From a basic diversification standpoint, if that company fails or shuts down, all your money will be lost. It is wise to consider alternatives and be able to get unbiased advice from an independent advisor, rather than from someone who is only incentivized to sell a product from one company.
Of the many things you can consider when choosing your financial advisor, this is one of the easiest and most transparent methods of elimination. If you were already aware of this, I’d like to know, in what scenario would you choose to work with a tied agent over an independent advisor? Feel free to comment below!