This is the first in a series that covers the dark side of the investment advice business. Before I begin my attack on the shady practices that are rampant in the advice industry, I want to point out that the vast majority of professionals I have known and worked with are high quality people who try their best to do the right thing for their clients. The problems are inherent in the system under which these fine people must operate. That will be my focus going forward.
I’ve organized this series into 7 sections, each one dealing with a specific aspect of the dark side of advice-giving. The seven topics are here:
1. Sales pressure
2. Warped incentives
3. Conflicts of interest
4. Unethical practices
5. Bad information
6. Bad products
7. Emotional appeals
Sales Pressure
While most investment professionals try to “do the right thing” for their clients, they also have to perform. They have sales quotas and bonus targets. If they don’t hit their ever-increasing sales goals, they face career extinction.
Investment sales people are part of a highly organized and very sophisticated industry that extracts $500 billion of wealth every year from individual investors like you. Think about that. How many industries can you think of that generate a half-trillion dollars in annual profits?
Pressure to generate sales is what causes most of the problems in the investment business. Brokers, advisers, planners – the people who are responsible for gathering assets and extracting the maximum revenue possible from those assets – are under tremendous pressure to perform, or face extinction.
More than 80% of all trades that take place in the market are the direct result of recommendations by sales professionals who profit from what insiders call “money in motion.” It doesn’t matter whether the investment agent is a broker, adviser, or planner – money in motion creates profits for the intermediaries. Whether it comes from commissions, fees, taxes, or penalties doesn’t matter. Money in motion is the bread-and-butter of the investment business.
Financial professionals are trained in aggressive sales tactics based on psychological principles that target unsophisticated and vulnerable amateur investors. They receive hundreds of hours of training that’s designed to turn them into experts in the art of influence and persuasion. They are taught to anticipate and overcome sales resistance and never take no for an answer. They can run circles around unsuspecting sales prospects by gaining psychological control over the sales process.
They learn that a good story is more important than the facts. They’re taught to overcome the four fears that haunt every investor during a sales presentation.
- Fear of making the wrong decision
- Fear of the unfamiliar
- Fear of giving up control
- Fear of losing self-esteem
The sales professional learns how to guide the prospect through each stage of hesitation, keeping a tight control of the situation while giving the prospect the false impression that he or she is the one in control. This illusion of control is an example of the psychological warfare being waged in an unfair fight between amateurs and professionals.
In the next installment of this series, I’ll tackle the warped compensation structure that rewards bad behavior and bad products in the investment business.