Dylan Ross submits: Most financial advisors are not capable of providing good financial advice. This is not because they are stupid or unethical; many are quite intelligent and almost all are well intentioned. They can’t give good advice because they don’t know how.
Many advisor trainees hired at Wall Street firms have no more expertise about investing or personal finance than the clients they will be expected to serve. Many have less. To ready these green advisors, most firms provide some type of in-house training program. The training usually focuses on the the firm’s products and how to sell them. For example, recruits are not taught about the negative impact fees have on returns, they are taught how to justify their fees. The usual line goes something like this: “Lower fee products don’t come with advice.” Never mind that the “advice” usually amounts to “buy this more expensive product.”
(New hires also study for the Series 7 Exam, which teaches them about different types of securities, how markets operate, and the regulations they must follow—but not how to give intelligent advice.)
Brokerage firms make more money selling expensive, actively managed strategies, so their training programs rarely give new advisors an opportunity to objectively compare the merits of passive strategies (indexing). Advisors are instead armed with talking points to overcome a prospective client’s inquiries about index funds. Some of the more popular rebuttals include:
- When you buy an index you are buying all of the market risk that comes with it (falsely implying there is less risk in active management).
- Yes, most mutual funds don’t beat the index, but I don’t use most mutual funds (implies that the advisor can select funds that will beat the index).
Indexing guarantees mediocrity (simply incorrect).
The sad part is that the advisor is not trying to pull one over on you; he or she probably believes this. Advisors also believe that their firm’s rigorous manager screening process is the result of something other than sales agreements and revenue sharing. Advisors mistake sales tactics for universal truths from the start of their careers--and tend to hold tight to these learned biases.
As they continue to build their practices, the advisors become more invested in those same ideas and their bias grows stronger. Unfortunately, the global effect of having so many pseudo-experts in agreement only perpetuates their misconceptions about fees, market-beating strategies, and other bad advice.
On the bright side, there are some competent advisors. The challenge is finding one. Referrals and references can be misleading because people don’t usually know about their advisor’s shortcomings until it’s too late. Asking probing questions about an advisors training and experience beyond the basic, “how long have you been at this?” may help uncover what he or she really knows.
Dylan Ross is a CFP at Swan Financial Planning, LLC. The opinions expressed in this post are his.