Are you being sold or serviced?
By David Haggard, CFA®, CFP
How can you tell when you’re being “sold” by your broker, as opposed to being “serviced?”
Here’s a good place to start: Remember that a salesperson often uses greed and fear to tap into your emotions. Gordon Gekko, the fictional mogul in the movie “Wall Street,” was not being fictional at all when he said, “Greed is good.” Everyone wants more, and many sales people are masters of that basic human desire.
Another truth is that everyone has fears about their wealth, however large or small. The fear of losing what you have will drive a lot of bad decisions.
There’s a common misconception that the past is prologue, that something that has happened most recently will happen next. So when a salesperson talks only about recent equity successes, you know you’re being sold. Recent past events, especially in the stock market, have nothing to do with tomorrow. So many have learned this the hard way. But still, the commonly observed effect known as “buyer’s expectations” persists, predicting falsely that something that happened most recently will happen next. Sales people will use this biased-expectations principal to appeal to one’s greed by offering market timing services with the false allure of outsized gains at your fingertips.
You can see both fear and greed work in concert when a salesperson trots out “inflation protection” products. The pitch is as common as it is deceiving: “Inflation has gone down, so it’s bound to go up. You need protection against that.” The best protection is the knowledge that inflation has been falling since 1980. The digitization of the global economy should sustain this trend as inefficiencies created by economies that instigate inflation are extinguished through continued technological advancements.
This conversation is purposefully omitted by “Wall Street Sales People” who wish to frighten you into buying heavily commissioned products that pledge to protect your wealth from this potential inflation thief. These same so-called advisors also front load unrealistically high inflation expectations into your financial plan, raising your required rate of return to fund your future needs, thus forcing you into risker asset classes or investments loaded with fees to compensate them. You are being sold.
The same hedging strategy on buying gold because the stock market has fallen has been used for centuries.
What can you do to protect yourself in this environment?
If your broker is working on a commission, beware. That’s an obvious and avoidable conflict of interest.
Be aware of how your balance sheet is being discussed by your advisors. Is your balance sheet being discussed in a weekly sales team meeting looking for “cross selling” opportunities for the institution’s profit? Is your balance sheet being used to promote recent returns to win your “other” assets from “other” advisors employed by you? The only discussion of your balance sheet should be to search for gaps in your progress toward plan success.
Pay your advisor a fee to manage your portfolio. That invites objective and rationality into the relationship and minimizes the effects of fear and greed.
Adhere to a formal investment policy statement to guide your decisions. If you don’t have one already, make it a priority. This statement builds an environment for sound and rational decision making by using practical guard rails of policy.
And lastly, consider using a fiduciary to handle your investments. Fiduciaries follow a golden rule that says their interest are governed by your interests, not the other way around. Remember, in the financial world all things ethical are legal, but not all things legal are ethical. Fiduciaries adhere to the legal and the ethical.
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