By Gaspar d’Orey, CEO and co-founder of Zercatto
Whether you’re a seasoned investor or just starting to build your own portfolio, it is only natural to want to seek expert guidance from a financial advisor. But if the advice you are offered turns out to lose you money, should you really be expected to reward your chosen ‘expert’ with management fees?
This approach to investment, although outdated, is all too common in the finance industry. In these models financial advisors are rewarded with fee payment whether their strategy turns out to be profitable, or not, for the investor. This fee may be in the form of a management fee from your financial advisor or through a brokerage fee for the tips of your broker. Either way, this outdated and somewhat backwards approach to investment is not meeting the needs of the modern investor.
Look at Google’s extremely popular pay-per-click structure (PPC). Google wouldn’t expect you to pay for a PPC ad if no one ever clicked on it, and the same should apply to the finance sector. Firstly, it wouldn’t be in your interest to pay fees to Google for an ad that wasn’t making you any returns on your investment. Secondly, soon enough people would stop bothering with pay-per-click ads if they were constantly throwing money at them and getting no new business in return. Luckily for us that’s not how it works. Instead, advertisers only pay when potential customers click on their ads. This way Google has to make sure that the ad gets in front of the right people. If Google doesn’t get results, it doesn’t get paid.
With this in mind, why should you be expected to pay a financial advisor if the service they provide is not resulting in any returns? This has to change. Both investors and advisors need to work together so that the interests of both parties can be realigned.
It’s with this aim that I created an alternative investment model, Zercatto. It operates on a ‘no win, no fee’ basis. As an investor you will pay a fixed fee to follow the expert’s strategy but unlike other platforms, you will only pay if the strategy you are following is profitable rather than a management fee or a fee every time they trade. Moreover, we have included a High Water Mark, which prevents the investor from paying a fee unless the expert’s strategy has achieved a new high.
This shift toward a fairer ‘performance-centred’ system for investors makes perfect sense. Not only does it ensure that investors only pay when they see returns, but it gives advisors an incentive to promote their clients’ interests and perform. In a nutshell, experts see a financial reward for making profitable decisions and investors are safe in the knowledge that the ‘expert’ has their best interests in mind at all times.
The current model is unstainable, and unfair; we should be encouraging people to invest, not deterring them with unnecessary and expensive fees. A fundamental realignment of the investor-advisor relationship is the only way to restore trust in the wealth management sector.