[Expected time to read: 7 minutes]
On a recent flight, I sat next to a nice guy called Neil.
Inevitably, we started talking about our respective professions.
Neil’s an engineer in oil and gas.
When he found out I’m in finance he asked me if I knew his ‘friend’, who’s also his ‘finance guy’ in Dubai.
But I soon understood the sort of person his friend was.
With friends like these…
He’s such a good friend, that when they meet up to talk through Neil’s finances, they don't do it in an office but a bar.
Last time Neil passed through Dubai, they chatted things through over a round of golf.
Because they have become such firm friends, Neil has introduced his finance guy to many of his colleagues, who also found him to be a ‘great guy’.
I was skeptical about this approach to taking financial advice.
So, to assure me I was wrong, Neil emailed me details of the products his friend had signed him up to.
- Evidence of over £110,000 in commission paid to his friend’s brokerage;
- Evidence of market underperformance, that mean years of extra work towards saving for his retirement;
- Evidence that it’s best not to choose your finance guy based on ‘friendship’…
"Those who cannot remember the past are condemned to repeat it. -George Santayana
In 1950s Britain, you could count on the Man from the Pru to be your ‘financial friend’.
He’d swing by your house, have a cup of tea, and sort out your money matters.
By the 1980s, companies like Prudential and Allied Crowbar were employing thousands of direct salespeople as ‘financial advisers’.
They went from door to door, peddling all sorts of products based on their personal ability to be charismatic, build trust, and above all sell.
Inside this industry this approach is called direct selling - and the lynchpin upon which it relies is the ability to form a personal relationship, or friendship, with the client.
Golf trips, drinks evenings, brunch, shared social clubs and home or office visits have always been the preferred approach for direct selling.
And of course, these salespeople appeared to be great individuals – because the advice they offered seemed to be free!
Cue endowment, mortgage, insurance and pension mis-selling crises…
The cost of free and friendly financial advice
It turned out that the free and friendly financial advice that abounded was driven by commission bias.
Close rates and charisma were valued more than professional expertise.
Fortunately, financial reforms followed.
Direct selling, forged on misplaced notions of trust and friendship, and funded by massive hidden commissions has died out in many developed countries.
But in expatriateland – where you and I live – that old model of direct selling ‘financial advice’ into your home by friendly commission biased salespeople is, however, alive and well.
As Frank Furness, one of the top sales trainers in the financial marketplace says:
“It’s the best job in the world. Where else can I go out and meet somebody, drink their coffee, eat their cake, and walk out with $5,000 in my pocket? No other business!”
But beware - that’s your money ending up in these salepeoples’ pockets.
7 reasons why your expat financial adviser should not be your friend
When asked about their reasons for wanting to invest, most people’s answers range from needing financial security, to wanting to retire early…
But dig a little deeper, and what most people really want is freedom.
Freedom to do more of what they want, when they want, with whom they want.
If I believed a financial salesperson would help get you closer to financial freedom, I wouldn’t be writing this list.
#1. The US Federal Reserve did a survey of consumer finance.
It found that friends were the average American's number one source of information for making financial decisions.
The reforms that ended direct-selling in the UK were focused on ensuring that something as important as financial advice giving was delivered by professionals, not friends or salespeople.
A professional has a high level of expertise and knowledge, both of which should be underpinned by exams and accreditation.
Think about chartered accountants, lawyers, engineers, doctors, teachers and architects as examples of professionals from whom you might seek advice…
…and then remember - if you think it's expensive to hire a professional, wait until you hire an amateur!
#2. Often the only way to tell whether financial advice is stacking up is to look at the numbers.
And as evidenced by another US study, most people have no idea whether the financial advice they are receiving is good or bad until a long time after they’ve received it.
This study demonstrates that rather than helping their clients, a traditional, commission based, conflicted adviser hinders them.
This is because a direct salesperson has difficulty separating advice that is in their own interests from that which is in the client’s best interest.
You shouldn’t care less whether an adviser is likable or not, you just need to care about the value they bring.
People often tell me they are happy with their investments because they are ‘up’. But 5 or 10% up over a period of years in which the market is up over 120% isn’t good…
A professional may give you some uncomfortable truths from time to time, but they will also quickly set you back on the best course for financial success.
Your friendly salesperson on the other hand will continue to feed you comforting lies.
#3. I’m not suggesting the expat financial adviser…
- Who has tracked you down and is cold calling you at work,
- Who is turning up where you socialise or,
- Who’s been introduced to you by your friend or colleague,
- And who’s now offering you the benefit of their free advice…
…is a bad person.
I have experience of hundreds of these people, and the majority have good hearts and decent intentions.
The trouble is, they work in a system that’s beyond their control – a system that has tremendously powerful financial incentives to focus on maximising its profits over yours.
Because these people don’t eat if they don’t sell you a product, it is impossible to get unbiased and unconflicted advice from the friendly direct salesperson who should be consigned to a bygone era.
#4. According to the Wall Street Journal, there are more than 200 different titles for financial advisers in the US.
But regardless of the job title, all that matters is how they act, because that is what will make the difference to your financial future.
Offshore, over 98% of all international financial advisers, no matter what job title they go by, are brokers. This means they’re paid to sell in return for commission advice doesn’t come into it.
#5. Turning to one final US study…
75% of Americans believe that every stock and bond broker, financial planner, wealth architect, IFA or whatever other made-up title their friendly adviser goes by, has a legal responsibility to act in their best interests.
This so-called fiduciary duty is actually only held by 6.25% of America’s entire wealth management profession.
And this fiduciary standard is only upheld by those expatriate financial professionals who charge fees instead of accepting commissions. For example, those holding chartered status from the Chartered Insurance Institute.
Does your friendly adviser qualify?
#6. I don’t know about you, but I don’t socialise with professionals whose advice and services I use.
I use a professional for things I cannot do myself, either because I don’t know how, or because I think they will do it better or more efficiently.
The only thing I want from them is the best advice I can get – not friendship.
Now contrast a professional’s approach with that of a financial salesperson who seemingly has oodles of time…
Time for a round of golf, time for a drink, time to spin a yarn which makes them money at your expense.
This is how traditional direct salespeople have always operated – on your time, at your expense.
#7. Do you want someone to play golf and to hang out with?
Or - do you want a financial professional who will help you reach your goals?
Do you want a doctor who tells you what’s wrong and then cures you?
Or one who ignores the bad stuff, letting you suffer just so you can be drinking buddies?
If you consider your current adviser to be an implicitly trusted friend, perhaps you need to re-evaluate that financial apathy you are embracing…
“A bad friend is worse than an enemy, an enemy you can see and avoid, but to detect an insincere friend is hard.”
- Bangambiki Habyarimana
Do you want a friend, or a chartered financial planner who upholds the fiduciary standard?
Do you want a friend, or a chartered financial planner who’s qualified and regulated correctly?
Do you want friend, or a fee-based financial adviser who cannot therefore suffer commission bias and mis-sell?
If you want a friend, it’s cheaper to buy a dog, or go here, rather than mistaking a financial salesperson for a friend…
And if you want chartered, fee-based, professional financial advice, in your best interests, go here…