Say No to Yes Man Financial Advisers

March 12, 2010 by  
Filed under Financial Planning

Mr. ToughMoneyLove is a big believer in self-management of personal finance, if you are willing to study, learn, and then fearlessly apply what you have learned. Too many people turn their financial planning over to so-called professionals who are more interested in selling than in objectivity.

The conventional wisdom says that if you lack the time or expertise to make informed decisions about your own financial planning, the next best thing is consulting a fee-only financial planner.  These advisors are paid only for their time. They do not sell financial products on commission and are not paid based on the amount of your money they are managing.

A recent study by a behavioral economist, however, is casting doubt on the benefits of using a fee-only planner to provide investing advice. According to the research, most planners reinforce bad investment behaviors rather than give advice that will correct those bad behaviors. They are, more often than not, “yes men” (or women.)

The data was acquired by sending actors around to different financial planners, pretending to need investing advice. According to the summary of the outcome:

The result was nearly always the same: The actors walked out with advice that mimicked the biases in the original portfolios. Investors who wanted to find the next hot sectors, for example, were put in actively managed funds that try to beat the market. The cash-sitters were more likely to be told to take the cautious step of buying index funds.

Why did this happen, even in cases where the planner was paid by the hour?

The theory is that the financial planners were concerned that giving advice that contradicted what the clients were already doing would alienate the clients, causing them not to return for more advice. Once again, human frailties cause self-interest to trump objectivity and hard truth. Planners want repeat business, even if it means handing out sub-optimal advice to get it.

You can also fault the typical client who tends to reject financial advice that does not align with their own ideas. Why pay for advice if all you want is affirmation of your own choices, good or bad?

This is why I am and will remain a DIY financial planner.

Source: Fortune article


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3 Responses to “Say No to Yes Man Financial Advisers”
  1. Ha! I’m a fee-only financial planner, but I don’t do that. If people come to me with that kind of stuff, I tell them what I really think. But I don’t always do the things that will make me the most money either. That’s a fault of being honest.

    If you go to a planner and he doesn’t do much for you, why would you go? Either he should affirm what you are doing and provide clear, concrete reasons for it. Or he should tell you what you can improve and why.

    Too many of the fee-only planners are guys who switched from commissions and still have that mindset. Not all who made that transition still act that way, but many do and its evident in the advice they give.

    This brings up a good point to challenge your advisor. You have to trust him to some point, but you should always ask for a clear explanation if you don’t understand the why.

  2. MasterPo says:

    I don’t trust planners in any form. :-(

  3. Evan says:

    I actually just wrote a post defending all financial planners:

    http://www.myjourneytomillions.com/articles/hate-financial-planners-defending-financial-advisors/

    TML & MasterPo,

    While you guys are clearly smart enough to handle those tasks performed by a financial planner not everyone is. Not everyone can grasp topics such as asset allocation, share types, protection contracts….hell, most people in America, fail to grasp the spend less than you earn concept lol.

    The fee vs product payment schedule doesn’t really make sense to me either. If you are investing $100/month, or even a $1,000 a month in steady chunks (or even if you were to drop in a $100,000) it is likely that the fee would end up costing you more depending what type of shares you were buying. It is just as easy to rip someone off if it is a fee based relationship.

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