The vast majority of us save money and invest it so that when we are older we don’t have to work anymore. We would like to think that the financial advisor
managing our money does so with our best interest in mind. But does this really happen?
The finance industry has a severely checkered history. We all have experienced, or know someone, who has been taken advantage of, manipulated, or simply
sold a shoddy investment or insurance product. Even if the insurance or investment salesman has no malicious intent, which I would assume most do not,
they can still push a high cost/low value product that generates a high commission for themselves but is not necessarily in your best interest. As
a result, the financial services profession has a horrible reputation and a great amount of distrust from the public. This ought not be so!
So, how can it change? One word…fiduciary.
- Duty of Care – the fiduciary must inform themselves of all material information before making a business decision. The fiduciary must assess all information with a critical eye and not simply accept information.
- Duty of Loyalty – fiduciaries are not allowed to use their position of trust to further their private interests. Specifically, they must protect the interests of the beneficiary, and they must refrain from anything that would cause injury or deprive them of profit which his skill might properly bring.
- Unethical Behavior Encouraged By Misaligned Financial Incentives – Billy Graham, a conservative religious leader, allegedly said, “Under the right circumstances there is no sin I would not commit.” He is right, and no matter how moral of a person you are, if you are in a high pressure, high commission, conflict of interest laden environment it will be very difficult to serve your client in their best interest. This is one reason why in the UK, the USA, and other developed countries the best practice is a fee-based arrangement where you pay by the hour of service or as a percent of the assets under management.
- A Very Low Hurdle to Work in an Advice-Giving Role – When someone treats your physical health you expect a medically trained professional who has studied and been trained, such as a nurse or doctor. Similarly, with your financial health, you want a competent and trained professional who takes their craft seriously and aspires to excellence. In finance, there are many ways to indicate your competency, whether through quality work experience, certifications (CFP, CFA, ChFP, etc.), education, and investment performance and risk management. There is a lot to understand in order to give competent advice regarding investments, insurance, tax, estate planning, and other financial areas of concern.
- If I am ethical but incompetent, I can’t help you.
- If I am competent but unethical, I will manipulate you.
- But If I am ethical and competent, then I can advise you in your best interest.
Finding competent and ethical advice at a good price can make all the difference.Professionals need to get paid to stay in business but it is important
that you are receiving commensurate value for your money.
Often times, investment products can have opaque and high fee structures that are not in the best interest of the client. Below is a graph depicting how
a diversified portfolio would have performed with different levels of fees.