Why your financial adviser should not be your friend
[Estimated reading time: 6 minutes - read while your taxi is stuck in traffic]
Updated 15th November 2017
There's a British saying that goes like this:
"With friends like these, who needs enemies?"
You say it about someone who claims to be your friend, but who treats you badly.
Neil had a friend like this...
I met Neil on a recent flight, and he told me all about his so-called friend.
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.
I didn’t...but I soon understood what sort of friend he was.
Friends like these…
He’s such a good friend apparently, that when they meet to talk money, they do it in a bar - or over a round of golf.
And, because they've become such good pals, Neil's introduced him to all his colleagues for their financial needs.
I was really sceptical about this approach to taking financial advice.
But, to assure me I was barking up the wrong tree, Neil gave me details of the structured products his friend had signed him up to...he was determined to prove me wrong...
With his permission, I gave the list to our team of chartered financial planners who created an X-Ray Review™ for him.
I then had the awkward job of ringing Neil to explain the evidence the X-Ray had uncovered…
- £110,000 in commission paid to his friend’s brokerage;
- Significant market underperformance;
- Years of extra work now required to save for his retirement;
It all boiled down to one thing...
It’s best not to choose your finance guy based on ‘friendship’…
"Those who cannot remember the past are condemned to repeat it."
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.
By the 1980s, companies like Prudential and Allied Crowbar were employing thousands of these direct salespeople.
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.
This approach is called direct selling - and it relies on the ability to form a friendship with your client.
It has nothing to do with the giving of personalised advice that's in a client's best interests.
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 in the UK.
But in expatriateland – where you and I live – that old model of direct selling into your home by friendly commission biased salespeople is 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 their pockets...as Neil discovered.
7 reasons why your expat financial adviser should not be your friend
If I believed a financial salesperson would help get you closer to financial freedom, I wouldn’t be writing this list.
#1. Too many people trust the wrong people!
The US Federal Reserve did a survey of consumer finance, and 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.
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. The numbers don't lie
Often the only way to tell whether financial advice is working 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.
You shouldn’t care less whether an adviser is likeable 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 your friend is a bad person!
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…
...works 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. 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. Understand what a fiduciary duty is
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 a friend - or a professional?
Do you want a financial professional who will help you reach your goals?
Or someone to play golf with?
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.”
- 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,