The Myth of the Unbiased Advisor

It’s true.  It’s true.

There is no such beast.  Sure, you think your advisor is the one, but I love to break it to you – NOT!

There is no such thing.  And I’m not word-playing here.  It is impossible for any advisor to not be biased and the reality is that all advisors have limitations which impinge their unbiased-ness based upon the organization(s) they associate with, are employed by or employ themselves.  Yes, even you, you fee-only phonies.

Obviously, the commission, product-centric salesperson is biased, and quite frankly, doesn’t spend much time hiding it.  He’s only got to convince you that his firm, and product, or process or philosophy is better.  And then you buy.  The pitch and the product or service.

But those guys get the most heat, often deservedly, from the competition, the media and the regulators.  But are you really being threatened by them, ma’am?

You shouldn’t be.  If you were in the market for a new car, would you walk into a Ford dealership, ask for the best car for you priced at $40,000, and be appalled when the salesperson doesn’t show you a Toyota?

Sure, Toyota may have the best product for you, but you walked into a Ford dealership? Stop your whining, do a little research, and shop at the right store!

The same goes for you, all of you.  Don’t complain about your advisor’s recommendation.  Get a new one if you’re unhappy.  If you walked into the financial services equivalent of Ford expecting Lexus-like quality, shame on you.  That’s your problem.  Not Ford’s.

But it goes a little deeper.  Let’s take “fee-only” financial planners.  Now, there’s nothing wrong with fee only.  And for some of you the imputed bias doesn’t affect, but for many others it does.

Yeah, I get it.  Fee Only.  No product sales.  Makes you feel good, like the advisor is only interested in telling what is the right thing to do.

But after you get that beautiful, $5,000, bound (and gagged) cookie-cutter, customized financial plan with lot’s of big words, pretty pictures and fine print, what are you gonna do?

Where do you turn to implement the plan?

Do you go to Ford, or Lexus, or do you go to Ford expecting a Lexus?

Many fee-only customers (and I’ve done fee-only, and what I am about to describe happened a lot) don’t know where to go.  Or are with the fee-only advisor because they are not happy with their existing one.  Do they go back to the guy they don’t like to implement the plan?

Do they grab their Magic 8-ball and hope that one side of the white, plastic, icosahedral die floating in alcohol dyed dark blue would magically display the name and number of a new advisor to implement the plan and put their trust in?

Nope.  The client is going to ask the fee-only advisor to help implement the plan.  Conflict of interest number one.  Does the advisor implement the recommendations, collect additional commissions (and maybe waive the plan fee if she’s on the up-and-up) or does the advisor refer the client to his favorite attorney, insurance agent, wealth manager, et al.?

Sounds fine and dandy until you wonder aloud, in your car, after having signed reams of paperwork for legal documents insurance policies and asset management accounts, did I just get screwed?

Put another way, even “independent advisors”, those who purportedly work for firms that don’t restrict what products they can sell have conflicts of interest and biases.  What product wholesaler is scratching the advisors back most frequently in order to motivate the advisor to use the wholesalers product or service?

What trips are being offered, trips awarded for “sales excellence” – aka “Selling the shit out of it”?

And what does the advisor know, or believes he knows, or think she’s an expert regarding, and on and on.

There is no firm, compensation plan, fee arrangement, restriction, regulation, oversight or anything to prevent conflict of interest or bias.

I could go on.  I can get even more creative.  And dig deeper into the reality of it.

I once worked for a company that claimed it didn’t give advice.  That’s right, “Didn’t give advice”.

Now, that may have been the corporate line to tow, but everybody in the company knew it’s non-advice giving advisors, or whatever we were called, were giving advice.

How could we not, when a significant portion of our compensation was related to product sales?

It was a joke.  A joke I even shared with my clients.  But this firms particular corner of the market was designed around the idea that we were cheaper (in theory) because we didn’t give advice.

We certainly weren’t pitching stocks like I did early in my career, but we were influencing our clients decisions, directing their dollars into mutual funds, managed money wrap accounts, life insurance policies, annuities and on and on.

And this hypocrisy was not limited to my employer, either.  And quite frankly, despite the somewhat misleading above-board corporate line, our clients were well served, disguised bias and all.

The reality is that not all bias is bad.  Not all conflict of interests are counter to the clients best interest.

I’ve worked for several firms in an advisory capacity where I was biased toward proprietary products but was not conflicted by it because I knew I was providing among the best, and often times the best, products and services available.

But I have a conscience and I take pride in my work.

What you, dear reader, need to be concerned about is the Ford salesman (and I have nothing against Ford.  I’ve owned a couple and been very satisfied) who sells you the newest micro-death machine while swearing up and down it’s safer than the full-sized SUV Expedition.

The financial services equivalent of that does exist, and that is where bias and conflict of interest get their bad reputations.

But please take this seriously, there is no situation I can think of, whether I’ve worked in the capacity or competed against it, where a conflict of interest or bias does not, or can not, exist.

So stop fooling yourself.  A Ford can be just as good as a Lexus.  But it might not be.  And don’t expect the Ford salesman to show you a new Lexus.   But don’t blindly accept the Lexus’s salesperson’s opinion that Lexus is the best.

I’ll delve more into this topic in the future.  With much more specific examples.  Please leave a comment, and share this post.  I’d love to hear stories from investors who have experiences like those I described, and others that perhaps I haven’t even thought of.

Your pal,

UFG

Watch the Wolves.

 

 

 

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