Thursday, September 19, 2019

STANDUP to the Financial Services Industry

John J. De Goey doesn’t mince words in his book STANDUP to the Financial Services Industry. He says you should be “protecting yourself from well-intentioned but oblivious advisors.” In addition to pointing out the current problems with financial advice, he paints a picture of what it should be. He also offers an extensive list of questions to ask your financial advisor. Although parts of the book appear hastily written, the main message comes through loud and clear: we pay too much for advice that is often based on “facts” that have been proven untrue.

Critics of financial advisors often paint them as villains, but De Goey says “Advisors might be better seen as unwitting accomplice intermediaries between some sophisticated corporations and trusting Canadian consumers.” So, your advisor may not be a bad person, but he or she works for people who know Canadians are getting a raw deal.

While there is reasonable debate about the value of financial advice, there is little doubt that mutual fund managers add far less value than they cost. The mutual fund “manufacturers pretend to reliably add value, and the advisors pretend to be able to reliably identify the ones who do so.”

De Goey says that advisors who want to do a better job for their clients by using cheaper products get gagged. IIROC Rule 29.7 (1) f) says that advisors can’t publish material that “is detrimental to the interests of the public, the Corporation or its Dealer Members.” This rule is applied liberally to suppress publications that criticise expensive mutual funds.

The author sees parallels between the financial services industry and the tobacco industry decades ago. The message that tobacco is harmful was suppressed in ways similar to the way that criticism of expensive investments is suppressed today.

“Currently, many advisors and clients presume that high product cost is immaterial,” and “most clients don’t understand how or how much advisors are paid.”

Advisors cling to easily refuted narratives like “Embedded compensation doesn’t cause advisor bias,” “active management consistently adds value,” “I’m a good fund picker,” and “I’m a good market timer.” This makes them “card-carrying and founding members of the fictional Society of Cognitive Dissonance.”

There were quite a few parts of the book that were harder to parse than they should be. I’ll point out three mistakes that aren’t too hard to fix, but a few other parts were harder to follow.

“It is not four times as much work to deal with one $1 million client as it is to deal with four clients with $250,000 each.” One instance of “four” needs to go.

“Someone ought to run a test to see what advisors would recommend if they had to choose between active mutual funds that pay an embedded commission and passive funds that do not.” This is the status quo. He meant to test a new scenario where the commissions are attached to the passive products. The purpose was to show that although many advisors express a belief in active management, they actually just follow commissions.

“What percent of actively managed funds survive to celebrate a 10-year anniversary?” “See if you can get your advisor to hazard a guess. Most will say something like 15% or 20%. The actual number is closer to 40%.” This initial question should be what fraction of funds don’t make it to 10 years.

In one section, De Goey gives some quotes he’s heard from advisors. One quote is “They don’t have any debt except for a mortgage and some student loans.” His amusing reply: “I’m a vegan except for bacon-wrapped steak.”

In conclusion, this book gives a valuable insider view of what’s wrong in the financial services industry. I recommend it to anyone who has a financial advisor, and especially to financial advisors themselves.

3 comments:

  1. Depends on the type of advisor. There is a big difference between commission-based advisors who sell products (over 99% of all advisors in Canada) and advice-only planners who provide unbiased plans with no sale of products. Paying for advice pays for itself many times over.

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    1. @Unknown: The value of advice is highly dependent on the quality of the advisor, the client's level of wealth, and the client's level of financial savvy. The blanket claim that "Paying for advice pays for itself many times over" is only true in a small minority of cases.

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  2. 'unknown', considering incentives is definitely important because this tends to drive long-term behaviour but I think it's dangerous to generalize too much.There are excellent, mediocre and poor advisors who work with clients on commission, fee-based, and fee-only basis.
    One challenge with certain advice only planners is that they are tempted to offer investment advice when this isn't really their domain. What could be easier than a simple broad based ETF portfolio?! This is great advice in theory for many Canadian investors but in practice there is an implementation gap for many as this blog and Canadian Couch potato can attest.

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