Are financial advisors professionals like lawyers and doctors? Or is it a mere salesmanship gig like a used car dealer or insurance salesman? As a former investment advisor I do have some input.
The industry struggle with that question because it operates in an obvious conflict of interest. Advisors have a fiduciary duty to put their client first and to look after their best interest. This comes in conflict with how the advisor is getting paid and his duty to the firm/bank. Remember that financial advisor doesn’t get paid for giving advices. Advices and retirement plan are free. A financial advisor gets compensated by selling products that has fees. When markets are down, it is not a win for the client because they lose money. When markets are down and the clients are losing money, the financial advisor and the financial institution still get paid. Maybe they get paid less but they still get paid.
Financial advisors see themselves as professionals but have an image problem. It doesn’t help that the industry aggressively lobbied for the lower “suitability” standard, with less transparency and, of course, higher — often much higher — fees. It also doesn’t help that the bar to entry is very low. The exam is way too easy and banks are pushing anybody to take it so they can have more people on staff selling their products. When I broke into the business they required everybody in the office (future financial advisors and support staff) to pass the exam because they didn’t want problem with regulators. Well I can’t remember anybody not passing. As a result the firm had a whole floor of people ready to sell mutual funds. The problem for the client is that it’s too hard to distinguish between a real professional financial advisor versus the guy that decided to pass the exam because he heard the money is good. For example, in hockey you have the major, senior and amateur league. Your talent decides what league you are in. In the investment business everybody is in the same league, good and bad, wearing the same suit and credentials. My suggestion is that if the industry wants to be taken more seriously and respected they should have higher standards. I’m sure professional financial advisors would welcome that.
Should advisers do what a client wants, even when the adviser knows it is not in the client’s best interests? If you don’t, he might take his business elsewhere. After all you are paid by the client and he won’t hesitate remembering you that it’s his money. You have to say “no” to your client when he insists on a service that you know defies common sense and works against his or her long-term interest. If this means that you will lose an account, so be it. It’s better to lose some short-term business than having to face career ending problems later on. And that “later” might come pretty fast once Mr. Client sees his net worth meltdown because you didn’t protect him. You failed at being a professional. You failed at looking after your client’s best long-term interest. That money that was supposed to be there for retirement, a vacation, the children’s education or project xyz is now gone. You were supposed to protect him and you didn’t. A financial professional should not be an order-taker or clerk; they should be trained professionals working on behalf of a client’s best interest. Even if that means saying no to clients.
To prevent that from happening I used to tell my client to take 10% of this money and open self-brokerage account. I never had a problem with that suggestion. Everybody has a little bit of a gambling side inside them and that way the need for action is being feed. Go enjoy an expensive gamble but leave your retirement out of it. So take 10%, have fun and good luck. After a while, if there’s any money left, it comes back.
There seem to be a false perception that advisors will push their client into taking on more risk than is prudent, buying the hot new thing, using excess leverage, catching the latest IPOs, or following the advice of pundits or talking heads. This perception is false. There might have been a time when business was conducted that way but it’s hasn’t been the case for a very long time. I used to be an advisor and portfolios were very plain vanilla boring. A mix of equity and bond funds, that’s it. The reality was that it was the client that kept pursuing the latest investment flavor of the month. It was my job to say no to my client because pursuing the latest media fixation was not in his best interest. My job was to protect the client from himself. That’s the main role of the financial advisor.
Not every client is the right fit. Usually if you have problems later on it’s because something didn’t click at the beginning of the relationship. Either you didn’t adequately explain your philosophy and approach or you signed the client just to get business. Usually it will cost you more money and headaches in the long run and nobody will be happy out of it.
For Mr. Client reading this, no financial advisor, or anybody in the world, has any idea what world market is going to do best next. Nobody! If Mr. Advisor stars yapping away about where interest rates are going and market timing, it’s better that you take your money elsewhere. The reason why I managed other people’s money it’s because I didn’t know what is going to happen next.
The answer to the question, are financial advisor professionals or salesman, is really comes down to how the advisor sees himself. This article may appear to be tough on financial advisors. There are some good financial advisors out there but unfortunately the bad ones really spoil the industry.