The real test in all the professions is “how can I be of service to my customers”? Ideally, both the customer and the professional will benefit.
What do you suppose is the primary role of a financial advisor? Would it come as a surprise to you to know that mot financial advisors earn their living by selling financial products that the prevailing culture in the financial advice business is more like that of a real estate agent than that of an accountant? Real estate agents make money by selling whereas accountants make money by advising. Financial advisors are somewhere in the middle, but most people agree that they’re a lot closer to the real estate agents.
None of this comes as a surprise, I’m sure, but most people have no idea about just how insidious the culture of sales really is. Financial advisors sanctimoniously insist that they do what they do because of their overriding concern for their clients- i.e. that they are professionals. This is sometimes true. It varies from advisor to advisor and from one situation to another. Often, it is quite a distance away from the truth.
Over the past decade, since Glorianne Stromberg released her reports on how the mutual fund industry works and could be improved, the sales element has been curbed. Of course, curbed is not the same as eliminated. Old habits die hard. It used to be that companies in the business (both product manufacturers and product distributors) would have trips for those “advisors” (read: sales agents) who were their best and most prominent “partners” (read: sales agents). Imagine if dentists could go to Maui just for getting their clients to use Crest instead of Colgate. Would you ever trust a dentist like that to offer advice about your teeth? What if there was a weekend in Vegas behind every root canal he could get his patients to subject themselves to?
The real test in all the professions is “how can I be of service to my customers”? Ideally, both the customer and the professional will benefit. People like David Maister have gone a long way in getting the professions to be more consistent, client-centred and productive through the purposeful application of clearly defined, repeatable processes that consistently put the end user at the apex. That kind of practice engineering almost never happens in the financial services industry.
Today, the junket-type trips are gone, but they have been replaced by something almost as lacking in couth. We now have distributor companies (the ones that employ the advisors) running programs where advisors can earn “points” based on a number of criteria. They’re over 90% based on- wait for it- sales! There are points for insurance sales, points for mutual fund sales and even quadruple points for wrap account sales. As a result, advisors are once again getting being tempted by their employers to put their own interests ahead of their clients’ interests.
Let’s use an extreme example. What if someone came to speak to an advisor who had $100,000 in cash in a savings account and a massive $100,000 credit card bill? The obvious, no-brainer bit of advice is to tell that person to take the cash and pay off the ridiculously high non-deductible consumer debt. But the advisor could earn points associated with $100,000 in new invested assets if the money was placed into a mutual fund. The advisor could just as easily quadruple that amount by recommending a (higher corporate margin) wrap account to the client.
It should be obvious that firms don’t award points for getting clients to pay down debt. Even though the professional thing to do would be to do exactly that, there would be a temptation that for some advisors to stray. It would be just too hard for some advisors to resist and recklessly naïve of the rest of us to think otherwise, human nature being what it is. I’m not suggesting the problem is rampant. But it very easily could (and very likely does) happen. Once is too often. And the only way to ensure that this kind of priority-morphing ethical bridge never has to be crossed is to blow up the bridge up altogether.
In the mean time, think about how you would feel if the provincial medical association offered an all-expenses paid week in Tuscany for the top 3% of all physicians in your province who recommend the most quadruple by-pass surgeries. Given the sanctity of what’s at stake, that sort of conduct would just re-enforce your faith in humanity, wouldn’t it?
John J. De Goey, MPA, CIM, FCSI, CFP is a Senior Financial Advisor with Assante Capital Management Ltd., member CIPF and author of The Professional Financial Advisor. The views expressed are not necessarily shared by Assante. email@example.com