“We’re going to have to decide what subsets of those who call themselves financial planners or advisers belong in the club, and who should more accurately be identified as a salesperson.” – Bob Veres
Last October we wrote an Insight addressing what we think differentiates the salesmen from the true advisors in our industry. The post addressed some of the images that pop into peoples’ minds when they hear the term “financial advisor”, and it highlighted many of the inherent conflicts of interest that put professionals at odds with their clients’ best interest every day in this business. We’ve reposted that Insight in its entirety down below, but first we wanted to tell you about a $48,300 check that we received in the mail last week.
Sometimes we make investments in funds that are offered through multiple sales channels, including both the “brokerage” channel as well as the “independent advisory” channel. Beyond the higher fiduciary standards that advisors are held to (see A Very Simple Principle), the primary difference is the way brokers and advisors get paid. Whereas a broker sells the investment and gets paid an up-front commission, as an independent advisor we recommend the investment and get paid the same asset management fee that we would be paid on any other investment in that clients’ portfolio. As such, we have absolutely no financial incentive to recommend one investment over another.
We recently had a client place a large amount of money in a real estate fund. This particular fund is typically sold through brokers who earn a 7% up front commission. This commission is expensed to the clients’ account – it’s a real cost to them. Given that we are not brokers, and we never charge commissions, we were not supposed to receive any up-front payment of any sort. You can imagine our surprise, then, when we opened an envelope and pulled out the below check in the amount of $48,300 last week! As it turns out, the fund company issued a commission check to us in error. We quickly resolved the problem, reversed the charge in the clients’ account – and shredded the check.
In the repost below we point out that for commission-based salesmen the financial conflicts of interest are grossly misaligned with the best interest of their clients. That’s not to say that an investment that pays a commission might not be perfectly suitable for the client, but it’s the misalignment of interests caused by the conflict that we think investors need to be acutely aware of. Running a $48,300 check through the shredder was a potent reminder of why it’s so important to pursue client relationships in which long-term financial interests are aligned between client and advisor, something that has been a priority for us since day one.
Originally posted October 18, 2016
You Might Be A Salesman If…
When people ask me what I do sometimes I struggle with what terminology to use. Not because I don’t know what I do, but because all of the most accurate descriptors have been co-opted by an industry that I honestly don’t want to be associated with. The term financial advisor, for instance, is used loosely to describe a variety of different types of financial professionals. Depending on your personal experience with our industry it may conjure up any number of different images, some of them understandably negative. As a result the term financial advisor has lost all significance in my opinion.
The financial industry encompasses many different types of firms, and the individuals working for those firms represent a wide variety of training, licensure, compensation and emphasis when it comes to the question of how best to serve the long-term financial interests of clients. Despite the fact that our brand promise and messaging may sound similar, many of these firms and individuals operate very, very differently than we do.
A number of these key differences were described in detail in my post from earlier in the year, A Very Simple Principle. In the article I discussed how many financial professionals aren’t even held to a fiduciary standard and legally are not required to act in their client’s best interest. Compensation models are rife with financial conflicts of interest and the true cost of doing business is rarely obvious and fully transparent to the client. This results in a service model and experience that is far more transactional than it is relational.
Bob Veres, a well-respected and widely read author in the financial industry, recently published an article in Financial Planning magazine entitled, You might really be a salesperson if.... The article, while probably not making Bob any new friends, humorously depicts many of the problems inherent in our industry. Today I’d like to cherry pick a few of my favorites, and make some comments on each one. The lines that follow in bold italics are pulled directly from the article, while the comments following each one are my own. So without further ado:
You might be a salesman if…
You believe everybody in America is underinsured.
Your financial planning software’s primary output is how much life insurance a person needs.
You aren’t totally sure how equity-indexed annuities work, but you wholeheartedly recommend them anyway.
Life insurance is an absolute necessity for most Americans, but it serves a specific purpose and shouldn’t be the only tool in the toolkit. For too many “advisors” all roads seem to lead to the same conclusion – more life insurance! When all you have is a hammer, everything looks like a nail. We have been amazed at the ways in which industry professionals have bent over backwards to justify excessive amounts of life insurance, and/or insurance-related products such as annuities, as the solution to every financial equation. Often times the salesman doesn’t even fully understand what he is selling (we’ve seen this firsthand). Coincidentally, these life insurance contracts happen to be amongst the most lucrative financial products to sell…but I’m sure that doesn’t have anything to do with it.
You have sales award plaques on your wall instead of a CFP certificate.
Your production levels qualify you for all-expenses-paid trips to exotic locations.
You compare notes with your peers over whether this is a successful year, and client outcomes are never mentioned.
“Sales”, or “production” is the one and only measuring stick used within many financial service organizations. Broker sales are tracked in real time and often published on a public scoreboard to incite inter-office competition. Getting more product sold is the primary focus of training and development, and is highly incentivized by recognition, higher payouts and special perks like exotic vacations. In the midst of all this very little attention is paid to actual client outcomes, even though this is what all the branding and marketing centers around.
Your compliance department would never allow you to sign a fiduciary oath.
You strongly oppose any rule that would require full disclosure of adviser compensation.
Your recommendations change whenever this or that company offers periodic bonus commissions.
I read a study once that said two-thirds of all investors had no idea how their advisor was being compensated. I don’t think this is by accident. For commission-based salesmen the financial conflicts of interest are so grossly misaligned with the best interest of the client that great efforts are made to make nothing more than the bare minimum disclosure of fees and expenses required by law. Short of reading all the fine print on every financial product being sold, investors typically will walk away with no real understanding of how they’re advisor is being compensated.
These are only a handful of the poignant (although admittedly snarky) jabs the article takes at the sales culture so prevalent in our industry. We’ve worked very hard to create a firm with a culture and service model that is more conducive to a win-win client/advisor relationship. We do not earn commissions, so we never have to deal with the conflicts of interest embedded in product sales. We foster in depth relationships with a small number of clients. These relationships are centered on empowering our clients to define their objectives and creating strategies and tactics that ensure their long term success. We pursue complete transparency by giving our clients detailed, real time performance reporting that they can access whenever they want. We also express our fee structure in clear terms that are simple to understand and can be quantified over time.
It goes without saying that there are plenty of great, trustworthy individuals acting in their clients’ best interest even at firms like the ones described in this write up. That said, the fact that the majority of our industry operates within such a dysfunctional framework is problematic to say the least. Few other industries possess such misalignment of incentives between service providers and consumers, and we’re sad to say that we see the evidence of this all too frequently. So the next time someone asks me what I do I might just shed the usual financial advisor label and simply say, “I’m not a salesman.”
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
Transparency is one of the defining characteristics of our firm. As such, it is our goal to communicate with our clients frequently and in a straightforward way about what we are doing in their portfolios and why. This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities. It represents only the opinions of Season Investments. Any views expressed are provided for informational purposes only and should not be construed as an offer, an endorsement, or inducement to invest.