“Don’t ask a barber whether you need a haircut.” – Daniel S. Greenberg, 1972
We’re all guilty of coming to conclusions that line up with our self-interest. However, it’s not always as obvious as in the case of a barber who always thinks people need haircuts. Often we don’t even recognize that we’re guilty of being influenced by self-interest.
Financial advisors, like the rest of us, have biased reasoning. Here I answer some common investor questions from the point of view of a most financial advisors.
Do I need a financial advisor?
Yes. How else can I make a living? People with advisors end up with more savings than those without an advisor.
Do I need to save more for retirement?
Yes. That way you’ll have more money invested with me, and I’ll collect more fees. You don’t want to run out of money in retirement.
How much do I pay in fees?
Should I borrow so that I can invest more?
Yes. This will increase my Assets Under Management (AUM) and I’ll collect more fees. Your investment returns will more than cover the interest payments.
Should I keep my pension or withdraw its commuted value to invest with you?
You should withdraw the commuted value to increase my AUM. I can invest it for you to make more money than your pension will pay.
Should I take CPP and OAS as early as possible?
Yes. Then you’ll sell less of your investments in the next few years to keep my AUM up. The government might cut these pensions.
All the answers serve the advisor’s interests, but it takes some knowledge to be able to tell if they serve your interests.
Not sure whether to laugh or cry. Well said!
ReplyDeleteHi Sebastien, Thanks!
DeleteYou are painting us all with the same brush! I am a Financial Advisor and one of your regular readers. I understand that this article was maybe written tongue in cheek, but there are some of us out there who truly do care about our clients and try to give the best, most objective advice possible.
ReplyDeleteSome of your recent articles regarding when to apply for CPP and OAS have been helpful for me and have shaped my thinking about that important decision!
Anonymous: I try to be careful with my words. I've captured the thinking of "most financial advisors", but not all. It's too bad that so few Canadians get to work with financial advisors who look out for their clients' interests.
DeleteGood financial advisors are well aware of how bad the bad advisors are. Understandably, the good ones see themselves as very different. Unfortunately, for the majority of Canadians, this difference between the few good advisors and the many bad ones is invisible.
DeleteAnother unfortunate reality for Canadians is that so many financial advisors don't know they're not helping their clients. I'm talking about the many advisors who actually know little other than their employers' training. These people often invest their own money as foolishly as they invest their clients' money.
DeleteI feel for the minority of good advisors and their attempts to get some sort of separate designation to make a distinction between themselves and the majority of bad advisors.
Agree with all of your responses to my last comment. It certainly is a battle to earn our clients' trust in an environment when bad financial advice is so pervasive.
ReplyDeleteHowever, one of the biggest hurdles is the perception that many people have that all Financial Advisors think in the way your post outlined. I guess it's my job to distinguish myself with high quality, objective advice and hope that my clients notice!
All of your points are correct, however I disagree with your usage of the term 'Financial Advisor'. The people you are talking about are 'Commissioned Salespeople'. There are actual Financial Advisors out there and they are 'Advice-Only Financial Advisors' or 'Advice-Only Financial Planners'. They do not sell products nor do they collect commissions, therefore no conflict of interest.
ReplyDeleteHabsFan: Unfortunately, I'm just using the term as it is used and as people understand it. I'd be thrilled if bank employees and others who push expensive mutual funds couldn't call themselves financial advisors. But they can and they do. It's frustrating that the average person can't distinguish between a fiduciary and a salesperson, but that's the world we live in right now. If I were to write about "commissioned salespeople", and a typical Canadian working with a commissioned salesperson read it, that reader would think "thank goodness I have a financial advisor rather than a commissioned salesperson."
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