Can You Really Trust Your Financial Advisor?

Investing and growing your savings is a tough skill to master. The brightest economic minds in the world sometimes have issues in figuring out the financial markets. Political leaders, with an unlimited supply of the best advisers, also have issues keeping their country out of massive debt. Money isn’t easy to manage; yet very few people seek help. Less than 15% of those in the developed world have a financial adviser, only 17% have a financial plan and only 56% of the wealthy seek financial help.

If we have issues in managing our money, why aren’t we seeking help from a financial adviser? Sadly, it’s because people don’t trust advisers. Studies show that as much as 70% of people who have or have had financial advisers don’t trust their recommendations. Some of the problems may come from the type of adviser that a portion of the 70% employed.
 
Let’s set up a hypothetical situation: You are a dumpling salesperson. Each morning, you receive various deliveries from different dumpling makers and at 9am you open your fully stocked store. People come in and ask you for a recommendation of your favourite dumplings and you normally recommend Greg’s dumplings. If the customer doesn’t like those, you recommend Sam’s and as a last resort, once all of the other dumplings have sold, you sell Owen’s.
 
What your customers don’t know when they’re asking for your opinion is that Greg takes 10% off your bill if you sell all of his dumplings within 5 hours. Sam gives you an 8% bonus and Owen doesn’t believe in that so he doesn’t pay anything. It’s in your best interest to push Greg’s dumplings. What if the reason that Greg’s dumplings have a higher payout is because they don’t taste as good as Owen’s? Owen may know that people love his dumplings so he doesn’t need to offer incentives to sell his product.
The dumpling shop owner on the other side of town purchases dumplings without any type of incentive so it’s in his best interest to only purchase the highest quality dumplings. His opinion is not financially motivated and he only has to think about the good of his customers. (And by the way, his customers love Owen’s dumplings).
 
If you understand our dumpling business, you understand the difference between commission based financial advisers and fee based advisers. Commission based advisers have an incentive to recommend certain products and although it would be unfair to say that all commission based advisers think about their best interest before yours, they have to stay in business and they have to feed their families. It would be difficult to pass up the higher commissions on one product versus the lower rate on another. Often, commission based advisers also receive a fee but that isn’t the same as a fee based adviser.
 
Fee based advisers receive a set fee based on an hourly rate, a flat fee for certain services, or a percentage of your assets. For on-going management of your money, the adviser may receive 1.0% or 1.5% per annum of your portfolio as a fee. The advantage of this arrangement is obvious. The more money your adviser makes you, the more money they make. (The happier the dumpling storeowner makes his customers, the more dumplings they will buy.)
 
Bottom Line
Counting on somebody to think of your best interest over his or her payout is not a chance you want to take. By hiring a fee-based adviser, you remove nearly all of the motivation to think of their best interest over yours. Of course, you should be highly selective of any adviser and just like any service-oriented person you should rely on word of mouth and other positive reviews.
 
Bill Longstreet is a partner with Shanghai based 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.