What FIFA Can Teach Us About Financial Advisors

2015-07
The FIFA scandal has been a huge black eye for the sport and a long time coming, but oddly, it does
have important lessons for personal investors. A conflicted environment leads to conflicted behaviour
in the FIFA case, and the same is true of financial advisory companies.
 
What is striking about the protests of Sepp Blatter, before his resignation, and the group charged by the FBI, is how passionately they believe they are innocent. If you look into their eyes, you see real shock and anger. Given how guilty they are, how is that even possible? They truly believe what they are doing is OK.
 
Your Colleagues Shape You
Many studies show that behaviour and beliefs are shaped by your peer group and also by your environment. The effects of this are bound to build up over the years. If your financial adviser, awesome honest guy though he is, is paid with commissions and surrounded by commission earning salesmen, then it is certain that his ethics and advice will be gradually transformed with a slow, imperceptible change over time. It might seem a stretch to conflate hidden commissions to corruption, but the slippery slope is real.
 
Bending The Moral Ruler
It reminds me of something that happened to me years ago when I worked for a different employer. I recall the Hong Kong born bigboss of the company suddenly pulling me aside to say, "You are an amazing adviser, so ethical, informed and diligent. You are the guy I'd pick in this whole company to look after my money", he suddenly informed me one day after months of not recognising my existence. "You've done some good deals in the last month or so. If you just bent your moral ruler a little bit more, you'd be an even more successful adviser’" he said as he bent his imaginary ruler with his hands. 
 
The Epiphany
That was probably the worst pep talk in the history of the world, since his speech triggered a lightning bolt of adrenaline from a question that hit me. "Was I changing to be more like a handful of colleagues I despised, who sold the highest commission paying product regardless of client needs, and had I already changed without realising?" I knew, at that moment, I needed to find a way to leave the company as soon as possible. Ultimately, that's what led me to co-founding my own firm, with the principle of aligning my interests with my clients via management fees rather than commissions.
 
I Was Lucky
I've seen many other good guys slowly change and become corrupted over the years. Almost every advisor starts in the industry to help people. Very few start in the industry with bad intentions. Still, the drift always happens to those who stay, almost unnoticeably in the beginning, until it ultimately builds into a total change of perspective.
 
You Have To Sell Yourself Somehow
Everyone has pride and self-belief in their work, and this changes over time. At the beginning, everyone starts with, "I believe I have the best solution", which then becomes, "It's the best solution in its class". After a while, this results in "This investment can help protect you against inflation", to the final cop-out excuse when confronted by the stark ugly facts from professionals of, "At least this investment ensures the client puts something away for retirement". That's the final justification veterans use to tell themselves they are doing the right thing. That in effect their clients are too stupid, lazy or indulgent to save anything if they didn't force them, with their aggressive sales tactics, into a restrictive product for a dozen years or more. These were guys who claimed they provide the best solutions available.
 
The Lesson
Look for a financial adviser working on a management fee basis with a guarantee of no hidden commissions or fees. Exchange traded funds should be mentioned frequently. Even though your adviser is an amazing guy, and probably the best in his company, the drip, drip, drip of pressure from earning a commission or being compared against a colleague more prepared to say what it takes to get a deal, will get the best of him over time. If your adviser is advising you to lock-in your investment to, "Protect you from yourself", or "For tax reasons", watch out! He probably believes that, but just like FIFA officials, he has lost all connection with what good honest advice for his client looks like. 
The Descartes Explanation
I know financial advisers in Shanghai and beyond who, even today, continue to torture logic in this way. They can't understand the fuss about commissions hurting client returns, but French philosopher, mathematician and scientist, René Descartes explained it best when he said, "A man is incapable of understanding any argument that interferes with his revenue". Just like FIFA executives, they really believe their reasons and self-justifications shared and buttressed over years. That's how advisers and good guys can continue to sell their high commission paying product with a straight face, despite the fact they know the client will be lucky to make a positive gain, even in the long term. That's how they can still look people in the eye and say, "This is a good investment for you". The pressure of peers and environment over time is astounding.
 
Owen Carterer, is a partner with Shanghaibased Caterer Goodman Partners, a primarily fee based financial advisory firm. For more tips on how to handle your savings, check out their blog, www.chinaexpatmoney.com