There are biases that affect the quality of advice we get every day of our lives. And not just financial advice.
When a real estate agent shows you houses for sale, they are working for the seller, not you. This affects which properties you are shown and your ability to negotiate the best price.
(This is why buyer’s advocates have become popular. As you are paying them to find your ideal property, your advocate’s interests are aligned with yours.)
In assessing the quality of any advice, it’s worth considering which party the seller is working for: you or the owner of the product.
There are other more subtle influences on the advice we get. While the medical profession manages potential conflicts by operating under a professional code of conduct, your GP may be influenced to prescribe some brands over others, due to a relationship with the pharmaceutical company (this could be done unconsciously…see below).
Financial Advice from a Real Estate Agency?
Big news in the business section of the newspaper this week is Ray White’s plan to start a financial planning business (read “Shock as real estate franchise enters financial planning market” for a snapshot of the main concerns).
At the heart of most industry insiders’ concerns is this question: can people get impartial advice from a real estate agency? (one that owns a mortgage broking business and who would directly benefit the more you borrow and the more you spend on property).
I believe you cannot get impartial advice. But, not because I think Ray White will be telling clients to borrow and buy property.
I’ll explain why. Then, at the end of this post, I’ll give you a real-life example of a conflict from a similar group – one that landed in my inbox in the last few hours.
Influences on Your Financial Advice
Yes, it’s technically possible for a business with such obvious conflicts to give impartial advice. But, if the people who run Ray White fully appreciate the conflicts involved in a real estate agency giving impartial financial advice, they are not acknowledging them.
Ray White boss Brian White told Fairfax that the financial planning division would be independent of any banks or financial group.
But this ‘independence’ doesn’t remove one of the biggest drivers of bad advice: conflicted remuneration. And it doesn’t address the elephant in the room: culture.
Conflicted remuneration can be simply defined as: any benefit given to your adviser (by someone other than you) that could influence the advice given. This includes payments made to a financial planning business by financial companies for selling their products. These payments could flow to the adviser in the form of commission, bonuses and even qualifying for an overseas conference (“junket”).
Even without these bonuses, there are strong influences on employed advisers trying to hit sales targets of certain products so they can retain their jobs.
And, more to the point, the advisers Ray White employ are unlikely to understand the conflicts their position presents.
In “The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest” Cain, Loewenstein and Moore, three prominent professors in organisational and behavioural psychology, found:
“considerable research suggests that bias is more frequently the result of motivational processes that are unintentional and unconscious.”
So, if advisers often don’t understand the bias in their own advice, how can we depend on conflicted advisers to avoid providing recommendations that benefit them more than their clients?
Why You’re Unlikely to Get Good Financial Advice From a Product Salesman
A Culture of Commission
There is a sales culture in any commission driven business, including real estate agencies.
This is also true for 99% of mortgage broking businesses (Ray White has 500 mortgage brokers).
Ray White are not likely to be setting up a financial planning division to provide a public service or to advise you how to pay off your debt faster (or avoid it altogether). Rather, they are likely attracted to the fact that a financial advice business can generate new income sources and house advisers that can recommend strategies that involve the sale of property plus the need for a loan, insurance and possibly a self-managed super fund (SMSF). All of which trigger fees and commission, resulting in higher overall costs for you and possibly unsuitable advice.
This presents a clear conflict of their interests with yours. When the bosses at a product sales factory can see this kind of opportunity to ‘cross sell’, how likely is your adviser going to be allowed to give you advice that doesn’t involve one of their products or services? Can you imagine them telling you to put your super into an industry fund, rather than set up a SMSF to buy property? Or to save a little longer, when their lending criteria says you qualify for a loan you can’t actually afford?
Although I’m not aligned with any financial group, even I have to deal with the conflict of being able to receive a commission. I generally charge a fee, but will consider commission where it’s clearly difficult for my client to pay my fee with cash or super. However, I will present the option of paying a fee and winding back all commission (which reduces long term costs for my client). I don’t think I’m going out on a limb when I say this: it’s unlikely that advisers in a commission driven sales business will ever offer a truly fee-based service to anyone.
Ray White director Sam White told the media that Ray White advisers would charge a fee for their financial plans but that they would:
- Charge fees that increase the more you invest, and
- Receive higher commission the more expensive your insurance.
In a previous post titled “Banking Bad: Is Your Financial Planner’s Fee Causing Bad Advice”, I mentioned the legal concept of seeking to understand the motivation for an act by asking, “Who benefits by the act”.
Did Ray White decide they could meet some financial planning need the Australian public is currently missing? Or, is it more likely they see an opportunity to sell insurance with their loans and recommend self-managed super funds to help sell more property?
The Impact of Sales Culture on Your Advice
Ray White’s LinkedIn ads for advisers asked for applicants with a “solid sales background”.
If you want an insight into a typical strategy employed by most financial advisers aligned with a business that produces financial products such as loans, read on.
Seminars: The Property Spruiker’s Favourite Weapon
The same LinkedIn job ad, also asks for people who can run seminars.
While much free information can be gleaned from seminars, unfortunately, they are often used to promote strategies that lead you down a particular path – one that may benefit the presenter much more than you.
The most common wealth building seminar topic in Australia recently has been “Building wealth by buying property in a SMSF” (read “The Investing Seminar Stitch Up” for a perspective on these seminars).
These property spruikers make money out of over priced property, lending at expensive rates, legal requirements, insurance at full commission and expensive SMSF set up and administration. It would be fair to say that the average Australian buying an average valued investment property on an average wage, would easily waste $20,000 – $30,000 following the advice in many of these seminars.
A Real-Life Example of the Pressures of Dealing with an Aligned Adviser
Last night I received an email from Jane, who is being pressured by an adviser to move from her Industry Fund to a Bank Fund. The adviser is trying to convince Jane she will get a better return based on simply moving into the Bank’s platform – advice she is right to suspect is mainly motivated by this adviser’s association with the Bank, rather than her best interests. I say this because her Industry Fund has performed very well and, based on the information she has given me, I can’t see a reason why she should move.
The sad aspect of this story is that Jane is retiring and does need advice on the best way to convert her super into a retirement income. She has legitimate questions that have nothing to do with performance or what super fund she uses. She is looking for strategic help and knows this adviser is overly focused on a product sale, rather than giving her structural advice.
This adviser calls Jane everyday and it’s clear his persistence causes Jane some amount of stress – stress that leads most people to give in and go with ‘Johnny-on-the-spot’, who doesn’t give up.
It’s these types of emails that make me feel sick in the stomach when I see aligned groups getting into the financial advice business.
I believe that most Australians would significantly benefit from receiving considered advice from a professional who isn’t aligned with an insurer, bank, mortgage broker – or real estate agency.
Ray White’s announcement represents a general trend towards ‘sales’ instead of ‘advice’. This exposes more people to “advisers” looking to sell products, hit sales targets and pursue their own financial interests instead of looking after those of their clients. Conflict is so ingrained in some advice models, that you need to actively protect your interests – and you can do this by dealing with an unaligned adviser who is better positioned to act in your best interests.
Contact me if you need advice.