This is the 2nd installment of our series that shines a light on the darker side of the personal finance and investment advice industry. (Read part 1 here.) The first article focused on the high fees that the industry charges, and the surprisingly large impact they have on your wealth over time. Today we focus on marketing, advertising, and sales practices in the industry. We begin with the oldest trick in the marketing handbook…
Obfuscation
The financial advice profession is first and foremost a business. And like any other business in any other field, its’ lifeblood is sales. It focuses the most time, money, and effort determining what sales pitch the customer will buy, and then how to deliver that sales pitch in the most effective way.
It uses a trial-and-error process to do this, and eventually finds the best ways to package and present its’ products and services. It experiments with neural linguistic programming and other advanced tools of influence and persuasion. It hones the message until it finds the most effective way to convince prospects to sign up.
In the effort to create effective sales pitches, it focus on what sounds good to prospects, as opposed to what is true or correct as an investment strategy. If the words that the salesperson uses puts the client at ease, then that’s a win. The goal is to gather assets, not to maximize the client’s returns.
The methods used by financial pitchmen are standard throughout the industry. Here’s a short list of selling techniques:
- Use superficial facts and figures (factoids)
- Speak in industry jargon
- Exploit the prospect’s will to believe
- Invite the prospect to become part of an exclusive club
- Emphasize your sophisticated technology
- Ignore or scoff at objections
- Create an illusion of prediction skill
In all honesty, there is nothing inherently unethical about sales people using these techniques to close deals. The problem is that we’re not talking about the purchase of a consumer item like a refrigerator or a new car. We’re talking about giving control of your life savings to an agent who has a very different agenda than your own.
Your agenda is to safeguard your assets while making them grow as fast as prudently possible. The agent’s agenda is to get control of your assets, and then figure out the best way to “monetize” your account (i.e. generate revenue for himself). Again, there’s nothing illegal, immoral, or fattening about doing this. But in the sales process, you and the agent are in direct conflict, agenda-wise.
So what can you do to protect yourself?
In a later essay I will delve into this question in detail. For now, here are a few quick tips about how to deal with financial advice professionals and their pitches.
- Your first line of defense starts before you even sit down with the salesman. Make it a rule to always go into a sales meeting with the understanding that you are going to talk things over with your spouse/friend/trusted adviser before deciding. This might trigger a “must act now” counter from the pitchman.
- If a pitchman pressures you, directly or indirectly, to act quickly before the opportunity disappears or his offer is withdrawn, thank him and end the call. Time pressure is a huge red flag.
- Always get at least 2 other quotes from competitors. There is rarely anything unique or patented in the investment advice market. Financial companies use different products (often proprietary) and may offer different levels of service. Getting multiple quotes allows you to learn more about what can actually be accomplished, how the different firms approach the process, and what types of products or services they will provide. The variance can be surprising.
- Always get it in writing. Always. If it isn’t in writing, then it never happened.
- Ask questions. Is the person who will be handling your money acting in a fiduciary capacity? (Make sure it’s in writing.) How much will their services cost, all-in, on an annual basis? Does the firm receive any compensation from any source other than the fees you will pay? Ask for details if the answer is yes.
Hiring a financial adviser is a big decision. Firing one that you’re not happy with is very hard to do. It’s much better to make the right decision the first time than to deal with the consequences of a bad choice.
Next week I’ll talk about Behavioral Influence: how the advice industry has learned to capitalize on the emotions, biases, and mistakes of retail investors.