Thursday, December 2, 2010

Taking it Easy on Financial Advisors

I received an email comment on yesterday’s post that ended with
“Thanks for the insight. And please take it easy on Investment Advisors ... some of us are genuinely trying to improve the lives of our clients.”
The funny thing is that I do believe that some (probably most) financial advisors genuinely try to help their clients. So how can I believe this given my many past remarks on this subject? Let me explain starting with an analogy.

The company I work for has a few direct competitors. The work my colleagues and I do is designed to increase our market share which means taking market share away from our competitors. If we succeed in making more desirable products, then our competitors will shrink and possibly even fail. This would cause people to lose their jobs.

Few workers think in these terms, but the truth is that their efforts are aimed at destroying other people's jobs. Of course this is the nature of capitalism and it serves us well, but I don't really like to think in terms of taking away someone else’s job. As a matter of fact, if I saw a direct connection between some action on my part and a particular person losing his job, I might not be able to bring myself to do it. This is likely true of most of my colleagues as well. Yet we all work feverishly to destroy other people’s jobs anyway.

The same type of situation exists with many financial advisors. They work within a system designed to extract a large percentage of their clients’ savings each year, yet they individually genuinely want to help their clients. In my opinion the problem is the system that most advisors work within, not the financial advisors themselves.

On a personal level, I have a close friend who tried his hand at selling mutual funds for a few years. I can guarantee that he really did want to help people. He is always ready to pitch in when someone in our circle of friends needs help. But the net effect of his efforts as a financial advisor was to move people into segregated funds that charge MERs of over 3% each year. I have a hard time calling this “help” regardless of his intent.

I’ll leave it up to financial advisors to decide whether this feels like me taking it easy on them or if it feels like more of the same.


  1. Dat is sum wacked ideas dude!

    Don't hate da Playa, Hate da Game! Fo Shizzle!

    No one goes into work with the idea that they are going to screw up today, but so many of us do, anyway.

  2. I love the way you put this situation in its proper perspective.

    As long as planners continue to be limited by industry standards and sell commission-generating funds, their clients are not going to do well.

    The planner who truly wants to help his/her clients has to do better. Selling no-load funds would be a good start. Encouraging the use of ETFs and their low fees would help.

    Other investment tools are available for planners who know how to use them (options) conservatively and efficiently.

    I agree. It's the industry that is the problem.

    Planners must charge fees for their service and refuse to take commissions. There is no other way to break this cycle.

  3. @Big Cajun Man: If someone had told me there was a connection between my post and rap I'd have been skeptical, but you found it!

    @Mark: Thanks. What's not clear to me is how difficult it would be for a "rogue" financial advisor to try to offer services with a more appropriate fee model.

  4. @CC: I agree that financial advisors need to be fairly compensated. Choosing a set of mutual funds is trivial and deserves little compensation. Customized advice and other types of help are more deserving of compensation.

    @Dale: What I observed with one friend was that he started with the best of intentions and had minimal success (and thus minimal income). At this point he had a choice to make. Either find a new line of work or sell expensive products more aggressively with little regard for clients. He found new work, but no doubt many others in his position just started selling more aggressively. I tend to view the problem as the system having beaten decent people into harming their clients. In this situation, I blame both the system and the advisors who operate within it.

    1. The first reply above is to Canadian Capitalist's comment:

      Nicely put. I have no problem with financial advisors providing a valuable service and getting fairly compensated in return. The problem is with the current system of incentives that are not designed to primarily serve investor interests. I can't say this is advisors fault alone. If enough investors vote with their wallet and seek out impartial advisors, the system will change in a hurry.

    2. The second reply above is to Dale Rathgeber's comment:

      You are, in my opinion, using a skewed sampling and are too magnanimous. Most financial products' salespeople that I run into are less interested in helping their clients, than they are in feeding their families. I understand their raison d'etre; but I don't have to like it.

  5. Your friend made a good decision!
    "What I observed with one friend was that he started with the best of intentions and had minimal success (and thus minimal income). At this point he had a choice to make. Either find a new line of work or sell expensive products more aggressively with little regard for clients. He found new work,"

  6. The investment business is just that, a business. Always has been, always will be.

    I enjoy your blunt take on this Michael.

    My Own Advisor

  7. @Chris: Fortunately for him his next career worked out well.

    @My Own Advisor: I agree that financial advice is a business that seeks profits the way other businesses do. I don't see this as a problem by itself. The way that an industry operates is shaped by customer knowledge and government regulation among other things. I'm hopeful that it is possible to shape the financial industry so that it better serves its clients.

  8. ... and then we have us self-appointed advice givers (though we often publish disclaimers saying "this is not advice") who don't get paid when people go out and buy those good low-cost passive index funds. Michael for your next post, a topic suggestion - Are bloggers better than financial advisors at giving financial and/or investment advice?