When "Free" isn't Free

When "Free" isn't Free

February 22, 2021

Last week, I wrote about the recent controversy regarding popular trading app, Robinhood. It got me thinking more about the whole concept of “free” financial advice and investing. We are increasingly living in a DIY world and it can seem like a good idea to avoid paying for financial advice in order to save on fees and expenses. Heck, it may even sound counterintuitive to pay for someone to manage your money. I mean, if you can do it yourself why wouldn’t you right? Unfortunately, there are a number of forces that are not in your favor when it comes to managing your finances. These financial foes range can come in the form of predatory marketing campaigns, rogue “financial advisors”, or even yourself. This week I want to shed a light on the true cost of so called “free advice” by reviewing current events, evaluating the things that we do to unknowingly sabotage our own financial future, and discuss why it makes sense to hire a professional.


Current Events

                In last week’s post I spent a lot of time discussing the specific issues surrounding Robinhood (you can find that post here). I don’t want to spend too much time on this again other than to review the way in which companies like this make their money. Companies like Robinhood market themselves as investing for the little guy. They have really leaned into this persona of steal from the rich and give to the poor. Part of the way in which they do this is by charging no explicit trading fees. They market themselves as being free to use with $0 in fees. The siren song of free trading and financial advice is a strong one. So also is the desire to feel as though we know something that the rest of the world doesn’t or that we can somehow come out on top when the rest of the world is flipped upside down. This makes apps like Robinhood very attractive. They know this, and play to those emotions through marketing campaigns that make investing look fun, easy and (if you use their app) free. Very little education is given and even less disclosure as to the risks involved. Unfortunately, as current events have shown us, Robinhood and apps like them are just like any other company or financial firm. They exist to make money and will do what they must to make sure that they turn a profit.

And free trading? Yeah, it turns out that it is not really so free. Many of these companies have a practice of selling trades as well as user information to larger firms. Those companies may then be able to buy or sell at a better price than what you put through on the app. In other words, you might buy a share of XYZ stock for $50 but by the time the trade is sent to a company who makes the trade the share price may have dropped to $45 a share. The trading company (called a clearing house) makes the trade and keeps the extra $5 that you paid for that stock. So, to conclude this point, there is no such thing as a free trade. You can’t get something for nothing. You will pay for it somewhere whether that’s through explicit fees or hidden expenses.


Self-Inflicted Financial Roadblocks

So we have talked about how one can be taken advantage of by misleading marketing but that’s not actually the greatest threat to your financial picture. You may also be tempted to think that dishonest financial advisors are to blame for most financial mishaps. While we have certainly seen instances of financial advisor abuse and helped clean up in the aftermath, I suspect that that is not the leading cause of financial woes to most individuals. To find the culprit responsible I suggest that we all take a look in the mirror. And I am not excluded from that just because I am a financial advisor! In fact, if anything I may be even more at risk for causing myself financial harm due to being overconfident with my own finances. In my experience, most people fall into one of two categories: Overconfidence or Lack of Confidence. Both are serious problems to overcome but tend to end with the same result.

  • Overconfidence

Those who are overconfident in their abilities to invest tend to take undue risk. They experience a little bit of success and come to the conclusion that they can day trade with the big boys. It’s kind of the same phenomenon that you see with people who gamble. They win big once and convince themselves that if they just keep playing the game that they will win again. Of course, we know that oftentimes that either never happens or the price to get there far exceeds any future reward.

  • Lack of Confidence


On the flip side you have those who lack the confidence to even get started. They are so worried about making a mistake or losing money that they just choose to avoid investing and financial planning altogether. Ironically, those folks often land in the same situation as those who are overconfident in their abilities: Not having enough at the end of the day to retire the way or time that they want to.


                There is also a third, hybrid group who is always very concerned about losing money and doing the right things, but also very confident that the bottom is going to fall out of the market at any time so they are constantly moving money back in forth and in and out of cash. Again, the end result is similar.


Why to Hire a Professional

                So what is the solution? How do you overcome both the predations of the world on the one hand and your own biases and head trash on the other? Well the answer could be to find someone that you trust to walk alongside you and give you advice. This person should NOT BE AN ECHO CHAMBER!! They shouldn’t agree with you on every single thing. That’s not helpful in any sphere of life and doesn’t help you learn or grow as a person. One of the most important aspects of what we do as financial advisors is “talk you off the ledge” so to speak. I can’t count the number of times that a client or a friend or family member has come to me asking my advice on an issue that has broad sweeping ramifications for their finances, and they are about to make a very emotional, very detrimental decision.Thankfully, most of the time we are successful in convincing those people to make a decision that will not damage their financial picture beyond repair but it’s not because we are just so smart and so wise and the client is just so unintelligent that they need our help to save them. Rather it’s because we have the benefit of looking at a client’s problem without the emotion. We are not emotionally tied to that money, which puts us in a pretty unique situation. We have the ability to give our clients our professional recommendation for their situation without the emotional stress that comes with it. I could go into great detail about what we do and how we help people build financial plans or manage their investment portfolio but the fact is this: The single most important thing that we do as financial advisors is act as a sounding board for their concerns and a barrier between them and bad financial decisions. Think less gatekeeper and more screen door. You can still see and get at your accounts and funds quite easily but you will have to go through that door. And yes, our clients DO PAY US for that service! Some of them will admit that outright while others may not even realize what a huge role that has played in their financial success.

                I want to end on this, there are a great many tools out there to help you manage your finances and many of them are very low cost. In fact, we are happy to recommend them where it makes sense. But if the COVID pandemic has taught us anything at all, there is no replacement for human interaction and conversation. Again, find someone that you trust to give you advice and counsel on your financial plan but don’t expect it to be free. As advisors, we help our clients find their way through a host of situations and problems but it all comes back to trust and communication.


I rediscovered this week’s song of the week after not really hearing it since high school. Brought back a lot of memories!


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

All investing involves risk including loss of principal. No strategy assures success or protects against loss