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Do You Want Rich Or Poor Financial Advisors?

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I posted this question on the BIGS and Seedly Facebook Groups recently and received quite a response. I guess this is an issue that matters to many.

To be fair, this was a loaded question. We had some respondents who took a step back to think about what I was trying to get at. The majority, however, just blurted out whatever was on their minds. I have no issues with that. I welcome any discussion. The social media catches the crowd with their most candid comments, and these comments go a long way to paint the general public’s perception.

Some comments were downright nasty. It seems that people generally do not have a good impression on financial advisors.

Is the wealth of financial advisors relevant?

Most people agree that the best financial advisors are ones who are competent and ethical, putting the interest of their clients before their own. I agree too.

How Do We Evaluate The Competency Of A Financial Adviser?

You can see that many people liked and supported Gary’s answer in the screenshot below.

Subsequently, when Gary asked how to evaluate the competency of an advisor, nobody was able to give an answer. So we want competent advisors, but we do not know how to determine competency. We know what the right thing to do is yet, we are unable to do it.

It is even harder to determine competency if the advisor is a stranger, an acquaintance whom you have had little contact with or even a long lost friend who suddenly ask you out to a cafe for a little catchup.

The bar moves even higher when we throw ethics into the picture. It becomes a lot more difficult to determine whether an advisor is ethical and whether he or she will always have your best interest at heart.

Why Are We Complaining Over Fees Then?

Many consumers have complained about the high fees financial advisors charge. The unhappiness is definitely more pronounced in the community of personal finance enthusiasts than anywhere else.

Yet when I asked about rich or poor financial advisors, most respondents insisted that wealth was irrelevant. Then why are we even quibbling over fees? Why are we complaining that financial advisors make a lot of money off their clients?

My view is that the main gist of the unhappiness is not fees. Fees are but a red herring. People are unhappy about the behaviour of advisors, in particular, those who sell products with the sole aim of hitting sales targets. Many of these products purchased are in fact not in the best interest of the clients. We wrote about this haunting issue previously.

Some of the consumers could have felt ‘cheated’ before, and in their opinion, these financial advisors are not worth their fees. The argument then evolved to become one whereby financial advisors should not charge high fees.

Hence we need to correct the framing of the issue –  Do not ask for low fees, ask for financial advisors who are worth the fees.

If an advisor is constantly worrying about making enough to put food on the table, he would not be able to focus and do a good job for his clients. If he is not paid enough, he would eventually quit. When that happens, the high turnover of advisors would do no favour to the clients, the advisors themselves and the overall standard of the financial advisory.

You DO Want Rich Financial Advisors

Competency is difficult to determine. We cannot make advisors sit for an exam. We cannot gauge their ability through our conversations because as professionals in their field, they definitely know more than us. Because we do not have avenues to determine competency and whether they are really worth the fees, it is only natural that we will look out for signals that could indicate these traits. Tat Tian was spot on.

Appearance is definitely one of the foremost signals.

In Robert Cialdini’s famous classic persuasion book, Influence, he highlighted that one of the weapons of influence is in the appearance.

“Aside from its function in uniforms, clothing can symbolize a more generalized type of authority when it serves an ornamental purpose. Finely styled and expensive clothes carry an aura of status and position, as do trappings such as jewelry and cars.”

Hence, it is not surprising that consumers are subconsciously judging the appearance of financial advisors to determine if they are ‘competent’ or not. It is a heuristic given a lack of reliable indicators. Expensive cars, luxury watches, nicely pressed shirts and diamond jewellery are surface indications of wealth, which in turn is a gauge of success. Our brains will pick them up and shortcut to the view that this particular advisor is competent.

NOTE: Heuristic is any approach to problem solving, learning, or discovery that employs a practical method, not guaranteed to be optimal, perfect, logical, or rational, but instead sufficient for reaching an immediate goal.

Knowing that they are being judged, financial advisors would spend money to build up these appearances and to improve the signals they are sending out.

#1 The Butcher Syndrome: How To Choose A Competent Financial Adviser

I spent the last many paragraphs pointing out the problems at stake. Let me share with you my own solutions on how to choose a competent financial advisor. It is not easy and it actually requires a fair bit of contrarian thinking.

I would like to quote Nassim Taleb, from his article “Surgeons Should Not Look Like Surgeons

“Say you had the choice between two surgeons of similar rank in the same department in some hospital. The first is highly refined in appearance; he wears silver-rimmed glasses, has a thin built, delicate hands, a measured speech, and elegant gestures. His hair is silver and well combed. He is the person you would put in a movie if you needed to impersonate a surgeon. His office prominently boasts an Ivy League diploma, both for his undergraduate and medical schools.

The second one looks like a butcher; he is overweight, with large hands, uncouth speech and an unkempt appearance. His shirt is dangling from the back. No known tailor in the East Coast of the U.S. is capable of making his shirt button at the neck. He speaks unapologetically with a strong New Yawk accent, as if he wasn’t aware of it. He even has a gold tooth showing when he opens his mouth. The absence of diploma on the wall hints at the lack of pride in his education: he perhaps went to some local college. In a movie, you would expect him to impersonate a retired bodyguard for a junior congressman, or a third-generation cook in a New Jersey cafeteria.

Now if I had to pick, I would overcome my suckerproneness and take the butcher any minute. Even more: I would seek the butcher as a third option if my choice was between two doctors who looked like doctors.

Why? Simply the one who doesn’t look the part, conditional of having made a (sort of) successful career in his profession, had to have much to overcome in terms of perception. And if we are lucky enough to have people who do not look the part, it is thanks to the presence of some skin in the game, the contact with reality that filters out incompetence, as reality is blind to looks.”

Following this principle and applying it to financial advisors, we should look for financial advisors who do not dress impressively. Yes, you read it right. Assuming that they are both similarly established, between someone who looks like Mr Manhunt and Mr Butcher, I would pick the latter anytime. This is because he would have had to overcome so much more to have arrived at the same playing field.

But this is only the first heuristic.

#2 The Lindy Effect: Pick The One Who Has Been In The Industry For Years

The second heuristic is called the Lindy Effect. I also read it from Taleb,

“Lindy is a deli in New York, now a tourist trap, that proudly claims to be famous for its cheesecake, but in fact has been known for the fifty or so years of interpretation by physicists and mathematicians of the heuristic that developed there. Actors who hung out there gossiping about other actors discovered that Broadway shows that lasted, say one hundred days, had a future life expectancy of a hundred more. For those that lasted two hundred days, two hundred more. The heuristic became known as the Lindy Effect.”

In other words, a financial advisor who has been in the same business for 10 years is more likely to be around for another 10. Of course, the true application of the Lindy Effect is on non-perishable stuff (books and theories for example) and being human we will all eventually die. Nevertheless, I still find it useful in this case.

If we put both heuristics together, the perfect financial advisor would be someone who dresses and speaks like a butcher (no offences to butchers here, Taleb’s words and not mine, do not send angry emails), and yet has been in the business for the past few decades.

Why You Should Pick A Financial Adviser That Speaks & Dresses Like A Butcher

First, we acknowledge that dressing up can increase sales and help the advisor do better. If someone can afford not to dress up and yet survive in this business for such a long time, chances are he must have something good going for him. Odds are, the keys to his success are in ability and competency.

Second, despite his success (staying in this business long enough), he still dresses and behaves humbly. This may suggest that he is not in the industry purely for the money. He probably enjoys financial advisory and gets his fulfilment from seeing his clients do well over the years. Either ways, the chances of you getting your interests looked after becomes higher.

Finally, I would suggest a third heuristic – Bayes Theorem. Do not be put off by the term. It simply means that we always start off with incomplete information about something and that gradually, more information will surface. Using the first two heuristics would make sure we are not too far off, but we might still be wrong. As we interact with the financial advisors, we will learn more about them, and we can better ascertain their competency and ethics.

At the end of the day, these are just heuristics. Though useful, they are only approximations to judge a person with whom you have little information about, yet you need to decide as to whether you want to take his advice or not. While they are not perfect, I believe they are more useful than the “Are you rich?” signals used subconsciously by most people.

Examples of Competent and Ethical Financial Advisers

To make it easier, I would like to provide some real-life examples of those who make the cut. My heuristics tell me that Wilfred Ling, Daniel Tay and Christopher Tan would fit the bill. Daniel has 8 years of experience in this industry, while Wilfred and Christopher are veterans with decades beneath them. None of them looks like butchers but they all live humbly and do not subscribe to unnecessary demonstrations of wealth.

Closer to home, I would not hesitate to recommend Louis Koay. While he only has four years under his belt, his heart to help and his competency in all finance matters is beyond reproach. I also have long-time friends whom I respect as financial advisors, and I have personally used their services too – Hendri Kamaruddin and Alfred Toh.

Final Thoughts

Whether or not a financial advisor is rich or poor does not matter. What matters most is competency and ethics. Unfortunately, wealth (especially surface wealth) is a very poor indication of either. We should never let that distract us from choosing the correct person to work with.

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Co-Founder. Believer of the Factor-based Investing approach. Running a Multi-Factor Portfolio that taps on the Value, Size, Profitability and Momentum Factors. Quant at heart. Believe the financial industry can treat their customers better. Wants to change the world.
  • Winder how much Christopher tan
    Wilfried ling and Daniel tay paid you.
    It’s obvious you are clueless and u know jack Shit about this industry. Another sponsored post sponsored by Christopher tan and his ifa clique.

    • They didn’t pay us anything. It’s not a sponsored post. Our company merely has close relationships with astute financial advisors.

    • Biggest issue with this industry is that (tied) agents are incentivised wrongly, so they sell anything as long as it gives them the money – Whether the product is actually good or not is irrelevant.

      IMO, paying IFAs fixed fees (and salaries) for their services is a better and more neutral way of rewarding them. This way, there’s also no conflict of interest as to what products they will be recommending you.

      I’ve had personal experiences with Providend (via DIY Insurance) and they are really good compared to my experiences with tied agents. I also met up with Louis and he’s really honest, he basically told me to keep my policies as they are and not to change anything as it’s already quite comprehensive.

      Sometimes I wonder if the tied agents themselves are being brainwashed :P. Their constant use of fear, idealistic returns (often without showing the fees involved), in order to get people to buy their policies reeks of insecurity. Unfortunately fear is a strong emotion to deal with, and people often end up buying policies they don’t need in a moment of fear, IMO.

      It’s always nice and comforting when an FA himself/herself can share his/her portfolio transparently, at least with percentages (not everyone is comfortable sharing actual numbers). Humility is also an important thing for sure. It’s always amusing when an FA dresses really nicely – Probably money made from selling ILPs :P.

      Great read as always, thanks for writing this!

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