Here at TEBI, we strongly believe in the value of good financial advice. But we’re also acutely aware of the harmful consequences of bad advice.
Sadly, good advice is far less prevalent than you might have thought, as a new book by the Candian adviser JOHN DE GOEY explains. The book is called STANDUP to the Financial Services Industry, and we’re currently serialising it on the blog.
Last time we heard how large sections of the advice profession are prone to “groupthink”. They think and act in a certain way because that’s the way they were taught and, they assume, the way that their peers think and act.
In today’s article, John De Goey looks at the biases and blind spots that, in his experience, many advisers have.
The simple truth is that, while there can be no doubt that advisers have misguided beliefs, there remains an open question about why they have them. The primary purpose of the book is not to answer that question, but rather to encourage people to contemplate and act on the more consequential question, which is, What are you going to do about it?
Indoctrination
Despite this, it is just human nature to wonder why people have misguided beliefs when there is no obvious reason why they should have them. One possible reason is that the financial services industry does more to indoctrinate advisers than it does to properly educate them.
When the barrier to entry is embarrassingly low and the number of resulting advisers is predictably high, it should come as no surprise that many registrants are not as client-centred as one might expect. Financial.
Embedded compensation
The other likely culprit is bias caused by embedded compensation. While some countries — the UK, for example — have done away with embedded compensation, most countries continue to do business the old-fashioned way. In other words, advice is less of a profession than a sales-driven industry. My own country, Canada, is a good example.
Most Canadian advisers have spent their entire careers using a business model that presumes the appropriateness of trailing commissions as a means of justifying relatively expensive, actively managed products and strategies.
Conservatism
Many seem oblivious to the alternative of using cost-effective products and transparently charging separately for their services. It seems they prefer to continue as they always have — perhaps out of sloth, perhaps out of fear for change (both themselves and their clients), or perhaps out of simple ignorance.
No one can say for sure why this is happening, but the larger and more consequential concern is that it is happening, and that people are being adversely affected because of it.
Deficit of self-awareness
The issue seems to be that advisers have a deficit of self-awareness and therefore see nothing wrong with the way they continue to go about their business. No one ever acted to solve a problem that didn’t exist. According to a large portion of the advisor population, there’s nothing wrong with the way they do business, so there’s no need to change.
The problem, of course, is that if no one will acknowledge there’s a problem, nothing will be done to address the problem. In fact, the problem might be allowed to persist indefinitely.
Given the distinct lack of self-awareness within the adviser community, it is likely that the only way to overcome the problem is for the people seeking advice to hold their advisers accountable by asking tough questions that require clear and verifiable answers. Any adviser who cannot do a reputable job of meeting that challenge cannot be trusted either to provide high-quality advice.
Next time: What can investors can do determine whether or not their adviser is misguided?
To find out more about John De Goey’s book and his efforts to educate investors, visit his website.
You may also like to read this interview that John gave to our sister blog, Adviser 2.0.
