The difference between financial advice and product advice

The difference between financial and product advice is not particularly nuanced, but it is important. The former delivers coaching and other financial planning guidance. The latter is about the nitty gritty of product design.

Both matter.  Too many people have gaps in their financial plan due to a lack of independent financial advice. And there’s real value in the delivery of customized product information and advice. What most clients need is a combination of the two, designed to meet their unique circumstances. 

A Russell Investments study found that of the 3.52% of value an advisor brings, the greatest percentage comes from behavioural coaching (1.43%), which is a good example of financial advice. Conversely, the lowest value comes from asset allocation and rebalancing (0.28%), which is more product-based activity and not so much advice at all.  

It’s also worth noting that product advice is an area in which people are more easily replaced by technology. Financial advice — for the foreseeable future — remains a human domain.

It’s important not to confuse the two, because product advice on its own is generally insufficient in helping clients achieve long-term financial goals. Insurance and investment product recommendations are important, but they don’t constitute financial advice. Your clients can’t take that information on its own and make the most of their financial options.

There are clients in need of financial advice, who already have the right product mix. Some have a large percentage of their wealth invested in something other than mutual funds and ETFs. There is a real need for fee-for-advice offerings alongside investment and insurance product advice.

Making a living

Monetizing financial advice, without offering product sales, can be difficult though.  

It’s tough enough to make a living earning commissions or fees based on asset balances. Our industry consists of large and powerful product manufacturers with firmly established revenue models. 

It’s no wonder that fee-based advisory practices remain in the minority. But that’s not acceptable. We need to ensure that clients have access to whatever they need to be successful.

An industry-wide effort

We’ve got to come together on this — financial advisors, financial services companies, MGAs, product manufactures and investment dealers. All organizations should support advisors in their efforts to provide comprehensive financial advice.  

One way to ensure that non-product advice is economically viable is to support advisors who wish to provide fee-for-advice options. I know it’s one more thing to keep track of, but it’s what clients need.  

Broadly speaking, the Canadian financial services industry isn’t set up to support advisors beyond product recommendations.  

There are some complex case teams out there, and some provide ancillary services like financial and estate planning supported by dedicated staff. But there are huge gaps in those services where valuable, non-product recommendations belong. Given that better financial advice could lead to more product sales, it should be something that smart advisors and great companies support.

What can you do?

Take a hard look at your practice. Are you providing written, actionable financial advice in addition to product recommendations? How do you help clients navigate those areas they find most financially stressful?  

There are tell-tale signs that your clients will benefit from non-product advice. Have any of them leased a car they couldn’t afford to buy? Do you have clients who can afford to save more, but aren’t comfortable committing to a higher regular payroll deduction? Do any of them lack sufficient emergency savings?

Ensure that you’ve got their upcoming major expenses on your radar as part of your financial review process. Decisions like how much to spend on their next car, or how to fund a wedding or vacation have knock-on effects that can push them off-track. Don’t miss the opportunity to provide more powerful advice to your clients. It will build stronger relationships and improve financial health across your book of business.