What is wrong with my industry? Part 3
This is the last part of a series designed to show you how to spot the bad folks in the investment world (my world). So far we have covered people who lie, cheat, and steal; people who act recklessly; and now I want to look at people whose judgment is clouded by conflicts of interest.
Anytime someone is giving you advice, one of the most important things you can know about that person is how they are getting paid. Consciously or subconsciously we are biased toward that which keeps us alive. And in our world, food, clothing and shelter are provided by money. That’s why it is good to know whether advice you are getting is because that is what the advisor believes to be best for you or because that is what the advisor thinks is best for them—only because it puts more money in their pockets.
Those two are not mutually exclusive. An insurance agent may recommend a certain policy to you that they believe is best for you. It might also generate a fat commission. Unless you think folks in financial services should work for free, there’s nothing wrong with that.
How do you tell the difference? Ask. Ask them what they are going to make if you buy that policy, mutual fund, or financial plan. Ask what other options they considered and why they felt that the one they recommended was best for you.
Some folks will tell you that one of the reasons to use a fee-only advisor (like me) is that they don’t have the biases of commissioned advisors. I’m glad people think that. However, it’s not true. Yes, fee-only advisors aren’t biased by the commissions they receive since they don’t get any. But we are susceptible to plenty of other biases.
For all of us there are also the biases that aren’t money- related. There’s the saying that if you have a hammer you tend to see everything as a nail. Likewise advisors who grew up or specialize in insurance tend to see that as the answer to most problems. Those from a brokerage background think that stocks and mutual funds are the answer. Bond specialist…you guessed it…they seem to like bonds a lot. Banks find that the safety of an FDIC-insured account will cure what ails you; so guess where an advisor with banking experience may send you?
The truth is that any of these “solutions” may be perfect for your situation—or not.
Unfortunately the majority of good advisors are not news-worthy. But neither are planes that don’t crash or families who get along. So while I do want you to be careful, fortunately the Madoffs of the world are few.
That completes this series about bad advisors. But let’s not leave it there. I don’t want you to have the idea that most people in my industry are either crooks, reckless, or biased against your interests. No, most are honest, prudent, and while they have biases, many know how to resist basing their decisions on them. If you believe an advisor can help you with your investments or retirement planning, do your homework, keep your eyes open, and hire someone.
This article was published under the title "Biases exist in world of finance"
in the Wichita Falls Times Record News on June 27, 2014.