Financial Services Industry

Why Investments Smell

Why investments smell

Our fridge finally died; we could also use a new dishwasher. So, when we found that a local retailer was offering a discount for buying more than one appliance, my husband and I drove over.

I’m what the Kolbe personality profile calls a “Fact Finder,” so I had done my research. When we arrived at the store, I whipped out the print outs of the brand and models that we wanted.
We started with refrigerators. The one I had picked was okay, but there was a better one in a neighboring price range we both liked more that I hadn’t researched.

Then we went to the dishwasher I liked. Looked great. Then we talked to Pat, the salesperson.

Big news was the discount fine print (not visible on the ad or the in-store promotional material): to get the discount we drove an extra half hour for, the appliances had to be the same brand. The fridge and dishwasher we wanted were different brands.

Pat told us if we liked the fridge, we should just look at dishwashers from FridgeBrand. Wow, FridgeBrand’s dishwashers had so many features, it was unbelievable. From Pat’s presentation it was clear that it was a better machine and a good deal.

We told Pat we needed to talk to each other privately. Time for me to whip out my smart phone /information and fact find. Pat rolled his eyes. Was it because the store was closing or because of what I was going to find out? This is just the kind of mystery that I love to uncover. What was Pat thinking?

When my husband gave me a 3-minute warning, I spit it out. “With the fridge we like, just like all the fridges I’ve researched, 10% of the reviewers say the ice maker doesn’t work. Sometimes ice spills all over the floor in the middle of the night. One reviewer wrote a really vivid description!” I was going to continue when I looked at my husband whose look communicated, “the store is closed. It’s ten at night. Do you think I want to hear the vivid description of ice falling all over the floor?”

“In other words, the fridge is fine.”

He started walking toward the cash register. “Oh, and the dishwasher?” I said. He stopped. “Several reviews say it smells.”

“It smells?” he asked.

“It doesn’t clean well either. One person says the smell kind of goes away, but yeah, 10% of the people say it smells.” We don’t want a dishwasher that smells.

This got me thinking—how much would I have had to pay Pat to give me an honest opinion?
I suspect that Pat knew reviewers say the dishwasher smelled.

As a fee-only financial planner, I put my client’s interest ahead of my own. I’m upfront about my fees.

What would it be like if I could walk into an appliance store and have it work like we operate our business?

How much would I have to pay to get the salesperson’s actual opinion and expertise? What would it be like if I could say to him, okay, here’s what, $100, $300 $500? Now tell me what makes the most sense for us. I’d really like to live in this world!

In the financial services industry, there are advisors, who, like Pat, make money based on commission. This causes an inherent conflict of interest. Commission sales people make recommendations based on their own agenda.

Just like FridgeBrand was offering some undisclosed incentive to Pat to sell their dishwashers, financial companies give advisors financial incentives to sell their mutual funds, life insurance, and annuities.

Unfortunately, a lot of these products smell.

There is another type of financial advisor, called “fee-based,” who charges the client a flat fee
and gets commission from the financial companies. More smell!

Not only that, I believe the label “fee-based” was developed to confuse consumers into thinking that the advisor is “fee-only.” This kind of deception reminds me of the fine print that says—oh, yeah, and by the way, you’re going to drive an extra ½ hour for nothing.

Thankfully, the public is catching on. Just like the Internet has sparked reviewer sites like that report on the best products, there are a growing number of fee-only financial planners. Fee-only is still a small portion of the industry, but it’s clearly what consumers want.

How to Fix Capitalism

Don’t get me wrong, there’s a lot to love about Adam Smith. Each person acts in his or her own self-interest in a free market…what’s not to love?

Well, take my industry, financial advising, for example.

Most advisors know a lot about financial products than the person purchasing their services or products.

the client is not in a position to evaluate the quality of what they are buying. They rely on the advisor, who might be serving their own interests, not the clients. Insurance companies in particular create life insurance products that are too complex for even other advisors to understand.

This basic conflict of interest is one of the elements at the heart of the 2008 market collapse. If mortgage brokers were required to sell people products in their best interest would the economic collapse have happened? I sincerely doubt it.

Two countries, Australia and the U.K., are now mandating that financial advisors stop charging commission. They are requiring advisors to operate in their client’s best interest. The U.S. is considering this, but we’re very far away, because a lot of big companies make a lot of money by conforming to a lower standard. A small part of the industry, which I proudly belong to, operates with a “fiduciary” standard, which means putting the client’s interest ahead of our own.

That got me thinking;
what if we changed capitalism? What if we required that when someone sold us something, it be in the customer’s best interest as far as the seller knew? What if most companies offered the lifetime warranties that a few companies do now? You could return any product at any time because you were unhappy with it.

As far as I know, it’s a radical idea!

I know a lot of people are going to say, Bridget, what are you trying to do, put Twinkies out of business? I mean who could sell Twinkies under that system? Wait! They’re already out of business.

Sure, this would change our legal code. Yes, there are a lot of practicalities to work out. But isn’t it worth considering and debating ideas that might improve the world?

Attorneys, CPAs, and doctors already have this standard of care. Why not the rest of capitalism?
Why not shift the responsibility to the seller? That way if they know they have a product that isn’t in the customer’s best interest, it would be their responsibility if they sell it, not the buyer’s responsibility to buy it.

by Bridget Sullivan Mermel

The Bitter Pie: Financial Advisors Industry Statistics

pie 2

The industry I am in confounds me. Why are so many consumers so poorly served?
Almost daily I hear stories of advisors hiding fees, not calling people back after initially selling them something, and having “advice” really mean selling people products they don’t need.

Most advisors operate with conflict-of-interest imbedded in the way that they operate. Advisors who make money by using a commission AND charge people for their advice, the “fee-based” advisors, are the worst. Next bad are the advisors who just charge commission. These business models are ripe for corruption; the advisor builds trust then recommends a solution to a problem that makes the advisor the most money.

Fee-only advisors operate with less conflict of interest. In fact,
most fee-only advisors pledge to put the interests of their clients ahead of their own. However operating fee-only generally means charging based on the amount of assets that you’re managing. That leaves clients with inadequate advice with their two of their biggest challenges—real estate and taxes. The ACA retainer model avoids the pitfalls of all the other business models. The advisors in ACA believe we have a better MO.

However, the pie chart above shows our market share in the industry.

Yikes! We’ve got a lot of work to do.

by Bridget Sullivan Mermel

The Five Steps “Say Anything” Advisors Use to Get You to Buy Products You Don’t Need

Consumers don’t know who to trust in the financial industry and the recent re-combinations and melt-downs haven’t helped. I look at how advisors operate on a continuum with two extremes: The Say Anything Advisor, and the Honest John.

The Say Anything Advisor

For the Say Anything advisor, the key goal is making the sale. Here are the five easy steps:

1. Gain trust by listening carefully to what a prospect says
2. Pick up on a prospect’s biggest fears
3. Harp on the fears
4. Offer a solution to the fear that entails using well-researched buzz words that appeal to a prospects emotions
5. Sell the advisor’s products.

Here are some common fears and corresponding buzz words that Say Anything advisors use to hook people into buying products they don’t need:

Buzz Words of the Say Anything Advisor:

Prospective Client Fear
Buzz words to hook you into the “Solution”--repeat often!
Reality behind the “Solution”
I’m paying too much in taxes
Tax loophole
Tax haven
Tax savings
Tax free
Low or no return mutual funds that are only appropriate for the top 1% of taxpayers
I’m might get sick and die

Take advantage of being healthy now in case you can’t get insurance later

Protect your “loved ones”
Life insurance that you don’t need
My investments aren’t returning as much as they could
Beat the market
Outperform the market
We can do better
Overly complex “investment strategies” that seem to go in one direction--down.

Some organizations focus on training Say Anything advisors and developing products to cater to the Say Anything Advisor side of the continuum. MorganStanley SmithBarney, Northwestern Mutual Life: I’m talking about you. I have met some Honest Johns among your ranks, but not many.

What the Honest John Advisor will say

On the other side of the continuum is the advisor I call the Honest John Advisor. The Honest John Advisor follows the following protocol:

1. Gain trust by listening carefully to what a prospect says
2. Pick up on a prospect’s goals
4. Offer solutions that help the client accomplish their goals that entail using well-researched, low cost strategies that take some effort to implement.
5. Help the client implement the strategies.

Strategies of the Honest John:

Prospective Client Fear
Solution proposed by the Honest John Advisor
Additional Comments
I’m paying too much in taxes
Have a qualified professional review your tax returns and see if they can offer suggestions on how you can save money.
Often you can employ strategies retroactively and file amended returns. Also looking at your tax situation in advance often helps know what tax strategies to employ in a particular year.
I’m might get sick and die

Live life to the fullest now! Get life insurance if you have dependents.
Most people don’t need life insurance, but if you do, low cost term is generally available.
My investments aren’t returning as much as they could
Nobel-prize winning research indicates that you can’t beat the market and that relatively simple investment strategies yield the best results.
Your money is better spent getting comprehensive advice rather than overly-complex investment advice from advisors trying to justify their fees.

by Bridget Sullivan Mermel