It has probably happened to you: Instead of receiving education, objectivity, and the straight story, you receive a subtle, but meaningful, disservice in the form of packaged persuasion, opinion indoctrination, and dissuasion. The bottom line is, when it comes to the financial advisory industry, there is harm, and it’s worse than you might think. Consumers are correct to be skeptical. This information is meant to serve as a reference that you can use to recognize any disservice should it happen to you.
The bottom line is, when it comes to the financial advisory industry, there is harm, and it could be worse than you might think.Getty Images
You may have heard the phrase “primum non nocere,” a well-known Latin expression in the medical field meaning, “First, do no harm.” Another version of this phrase was articulated in my all-time favorite client request, which stated, “No B.S. Just tell us what we need to know.” Think about advertisements, articles, radio shows, news releases, books, clubs, and actual presentations. It shouldn’t be too much to expect financial advice to be mutually beneficial to both the consumer’s and advisor’s interests. (I’m doing both right now!)
To be told, or not to be told? That is the question.
Sometimes, advice can be nothing short of a purposeful shutdown of alternative ideas with the intention of dissuading you from competing viable considerations. How can advice possibly be of best interest if all relevant options are not presented? Even in a compare-and-contrast capacity, you should still know all the options. What if you reach conclusions or take action based on skewed information or a limited set of alternatives to consider?
The “purpose” concept
Information is often presented in absolute terms, such as “good” or “bad.” The more relevant question is, “Good or bad for what purpose?” A Rolls Royce is good, but not if you’re using it for landscaping jobs. There is a reason you can’t order shrimp scampi at McDonald’s, and it’s not because it’s bad. It is because it does not coincide with the purpose.
How to flesh out the truth
1. Review the comments section in articles. You will instantly know if it’s controversial info based on the complaints. Comments that indicate the source of the expertise, present detailed responses, and use high-level communication techniques, such as sentences with punctuation, are a sign of the truth. Cryptic, emotional half-thoughts … usually not so much.
2. Ask for objective, third-party research on topics. Knowledgeable advisors should have this ready to go because they care, while others will often have to think about it and get back to you.
3. Get presentations in writing; it holds people accountable.
4. Work with people who are not opposed to collaborating with other advisors or family members. People with strong, viable ideas are not afraid to engage. People with self-serving ideas prefer to block out knowledgeable opposition.
5. Ask a test question on something you already know about to see if the response is in line with what you know to be true.
6. Ask the following question: Can you tell me something you have learned from another advisor or client? The response should highlight whether someone is personally interested in their work or just selling you something.
7. Check professional licenses. The person yelling the loudest about how bad something is often has no license or certification to offer that product. Or, it just competes with their offering. Think of annuity bashers, for example.
The arithmetic of commissions
Some people demonize the word “commissions.” Commissions are just a method to calculate compensation and have no more, or less, conflict of interest than other methods. Nobody complains when commissions are used in other industries and called by other names (profit margins, fees, markups, wages, retainers, revenue splits, etc.). For a long-term client, a one-time 5% commission (which some would label as high) is, in fact, cheaper than an ongoing 1% yearly asset-based fee after the fifth year. Another reason some firms consider commissions bad for consumers is that they’re less desirable for their business valuations. A firm with steady, recurring fee-based revenue is easier to value and sell than a firm with one-time commissions in the revenue profile.
The fear approach
Unfortunately, this approach works very well. Rather than proposing a consultative solution to your problem, you are directed away from something under the guise of a second opinion or a warning to beware of something.
The misdirection approach
An example of misdirection would be a statement such as, “While some people make commissions if you make money or not, we do better when you do better.” Sounds great, but recognize the misdirection. That advisor also makes money whether you make money or not; it’s called a fee instead of a commission. Their model pays them more as the account grows, but their phrasing makes it sound like a benefit to you.
The fiduciary buzzword
The fiduciary rule, also known as the best interest rule, has been in the news a lot. Some people use it as a marketing tool to imply that they are special or better than the competition. Understand that it has almost nothing to do with ensuring that one advisor is correct and another advisor is incorrect. It’s mostly a legal concept. Think about it: If the thousands of fiduciary advisors are all correct, how can their advice differ so much?
Collaboration can be the key.
A partner of mine in the credit union auditing field educates clients about the benefit of synergy with interrelated advisory professionals. For example, in a business pre-funding scenario, the timing of investment revenues must mesh precisely with accounting specifications. Having one without regard to the other is pointless.
Little words; big concepts
Think of a word, like “vehicle” or “pet.” Different types have different purposes. Some attribute negative details of one type to the whole category, which can be unhelpful and disingenuous. For example, the words “annuities” and “risk” are often mischaracterized.
Conditions can change drastically.
Conditions are currently changing in the areas of trade policy, political power, interest rates, and taxation, to name a few. These changes can affect the makeup of favorable and unfavorable strategies. Strategies should be responsive, not stagnant. Examples of strategies that can be drastically affected are bonds, target-date funds, and passive index funds.
Cheap isn’t always the best value.
This truism originated from my property insurance advisor and is equally relevant to today’s topic. Don’t expect a low-cost offering to be proactive, accommodative, or comprehensive beyond a basic level.
What now?
From a strategy perspective, it may behoove you to know about these concepts:
· Strategies beyond the basic idea of buying and hoping the market goes up have the advantage of not being solely reliant on educated guesses about selection, timing, and direction.
· One thing all large, uncomfortable losses have in common is they all start as small losses. Controlling them early on is possible.
· Reducing risks is different than shifting risks to another party.
· Moderate returns not exposed to market losses can produce results similar to more substantial returns that are exposed to losses.
This content was brought to you by Impact PartnersVoice. Comprehensive investment advisory services offered through Popa Financial Services, Inc., a Registered Investment Advisor. Annuity and insurance services offered through licensed professionals of K2 Financial Group. DT006187-0120.