This week was the annual "Money Smart Week" event, sponsored by the Federal Reserve. For us, that means a long week of daily presentations on financial topics. And for the public it is a great opportunity to get some financial education without the pressure of a sales pitch (as that is not allowed by the rules of the event). We had great attendance in Sheboygan County, and last Saturday's Money Conference in Oshkosh was a great success.
However, I still can't help but wonder what happens after all of the events are done. As a presenter I get a lot of interesting questions, and I tend to hand out a fair many business cards over the course of the week. However, these are not great client acquisition events for us, and the time spent on paper and presentation design are quite high compared to the return on investment. But we do it anyways because of our commitment to investor education.
I often wonder what people decide to do. Do they go just get busy and put these great intentions of change on hold? Do they go back to their old broker and get talked out of things--or further confused? Do they simply try to take what they learned and apply it on their own. In any event, some day it sure would be interesting to know. What I fear that happens in many cases is that they will take all of the wonderful knowledge they learn attempt to implement it on their own, and will yet again be unhappy with their results. I mentioned this in my one classes this week. You can do everything right on the costs aspect, you can remove all active management from your portfolio and make it extremely cheap, but there are other overriding factors that determine investor success.
DALBAR does a study every year on the do it yourself crowd; their QAIB study. Each year it looks back at the past 20 years and compares average investor performance to the S&P 500 Index. Year in and year out the index outperforms the average investor by about 2 to 1. If we are honest with ourselves, we know that we cannot all be above average investors, and only the very luck or very very highly trained are getting a return any where close to the market average. This is human nature however to deny our "averageness". A famous way to show this bias is to ask all of the people in the room who feel they are above average drivers to stand up. Usually about 75% of the crowd will stand up. We of course know that that cannot be true- half of the people in the room are below, and half of the people are above, the average skill level driver.
Even if somone realizes they do need help, I think people struggle with what to look for in an advisor. That will be a topic for my next blog post.
Friday, April 26, 2013
Wednesday, April 3, 2013
A Question of Ethics
Recently I came across a situation that I thought would make a good topic of discussion, as it deals with understanding how people in our industry get paid, and also ethics.
For this story to make sense, you have to first understand how people in financial services get paid.
The first method is under the old commission based system. The true name for these individuals is "investment representative", although they will use many different titles. In the old days they were just called brokers, but that name has taken on a negative connotation. In this system, individuals are paid a comission by the company who's product they sell to you. This product could be a mutual fund, insurance policy, or annuity. These payment rates will all vary by product, and as you can imagine one way these companies try to attract agents is to pay a good commission rate. You, the customer, are not paying the agent directly. Many people critique this system, pointing out the obvious conflict of interest between client and financial products company. The agent may be inclined to sell the products with a higher payout, while another product may be better for the client. Interestingly enough, brokers only have to sell a product that is "suitable". A suitable product may or may not be the best for the client- but it's ok.
The other payment arrangement a person like us who can work under is a fee arrangement, or fee based planning. Here, advisors may charge hourly rates, a fee for a specific plan, or a fee on assets they oversee. Here there are fewer conflicts of interest because whether the client buys fund a or fund b, the advisor is paid the same. Here the client pays the advisor directly.
And here is where our story begins. Let's say a financial advisor (fee based), charges a client for a financial plan (and not a small fee, like over $1000). This advisor is free to recommend any product in the financial universe- and they still get their fee because the client is paying them for "the plan", and not selling them the fund. But what if the advisor is also a broker?
Do you think it is unethical for a financial advisor to charge a client for a financial plan and then have them purchase a fund that they will in turn earn a commission on by being broker? Personally I think it is.
For this story to make sense, you have to first understand how people in financial services get paid.
The first method is under the old commission based system. The true name for these individuals is "investment representative", although they will use many different titles. In the old days they were just called brokers, but that name has taken on a negative connotation. In this system, individuals are paid a comission by the company who's product they sell to you. This product could be a mutual fund, insurance policy, or annuity. These payment rates will all vary by product, and as you can imagine one way these companies try to attract agents is to pay a good commission rate. You, the customer, are not paying the agent directly. Many people critique this system, pointing out the obvious conflict of interest between client and financial products company. The agent may be inclined to sell the products with a higher payout, while another product may be better for the client. Interestingly enough, brokers only have to sell a product that is "suitable". A suitable product may or may not be the best for the client- but it's ok.
The other payment arrangement a person like us who can work under is a fee arrangement, or fee based planning. Here, advisors may charge hourly rates, a fee for a specific plan, or a fee on assets they oversee. Here there are fewer conflicts of interest because whether the client buys fund a or fund b, the advisor is paid the same. Here the client pays the advisor directly.
And here is where our story begins. Let's say a financial advisor (fee based), charges a client for a financial plan (and not a small fee, like over $1000). This advisor is free to recommend any product in the financial universe- and they still get their fee because the client is paying them for "the plan", and not selling them the fund. But what if the advisor is also a broker?
Do you think it is unethical for a financial advisor to charge a client for a financial plan and then have them purchase a fund that they will in turn earn a commission on by being broker? Personally I think it is.
Subscribe to:
Posts (Atom)