Questions you should ask a financial adviser

Posted by TEBI on July 11, 2019

Questions you should ask a financial adviser


When choosing a financial adviser, how do you know you can rely on the advice they give?

TEBI is currently serialising a new book by Canadian portfolio manager JOHN DE GOEY. The vast majority of advisers in Canada, the book claims, have misguided beliefs, which often means their advice causes harm to those they purport to serve.

In this, the fourth part of this seven-part serialisation, the author suggests some questions that every client should put to their adviser.


This is where the rubber begins to hit the road. Until now, we’ve been talking about what the problem is: why it exists, why no one has really noticed it. The time has come to probe even deeper so that we can start making tangible recommendations for investors. You will need to act to combat the unwitting biases of your adviser if you have determined that a meaningful bias exists. Hint: it almost certainly does.

A good deal of why the problem has become so widespread and pervasive can be explained by popular psychology. Some of the concepts explored (e.g., confirmation bias and overconfidence) are well-known and widely accepted elements of behavioural economics. Others, however, go back much further and trace back to generations-old sociology and psychology textbooks. As far as I know, no one has ever applied established psychology concepts to macro-level financial advice.


Running with the herd

For instance, the group psychology concept of “running with the herd” has been widely recognised by such luminaries as Stanley Milgram and Solomon Asch. It is just human nature to go along with the crowd when virtually everyone in that crowd has a consistent perspective. Independent viewpoints are hard to come by when they are met with ostracisation by peers and colleagues.

This unwitting lack of independent thought gives way to “groupthink” and the self-fulfilling prophecy of things being important simply because people think those things are important. For instance, past performance was never a reliable determinant of future performance, but since so many people (advisers and investors alike) act as though it is, the consideration becomes implicitly relevant even though evidence shows it is explicitly irrelevant. Pressure to conform means the problem never gets solved.


The challenge for clients

The challenge for you as a client is to work out whether your well-intended adviser has been bamboozled into giving advice that benefits product manufacturers more than it benefits you.

One example of this is the old chestnut that “product cost doesn’t matter; what matters is after-cost returns”. If only it were true. Again, pressure to conform leads to a presumptive value proposition that can be (and has repeatedly been) discredited.


Questions to ask

So what should you be asking your adviser about? The key questions are largely attitudinal and biographical. There are no unambiguously right or wrong answers, but the responses you get might well provide the context for what is to follow.  The things you should be able to determine about your (potential?) adviser include:

— Experience, including credentials

— Philosophy and beliefs (about embedded compensation, the role of an adviser, cost, etc.)

— Specialties (if any)

— Typical client

— Practice size

These are the sorts of things that should all be considered when you hire someone to provide financial guidance. They may seem basic, but they lay important groundwork for what follow. These early questions are open-ended inquiries about your adviser’s background. The tougher questions come later.


If you haven’t been following this series, you can catch up here:

How to protect yourself against bad advice: An introduction (Part 1)

Has your adviser succumbed to groupthink? (Part 2)

The biases and blind spots financial advisers have (Part 3)



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