The media is suddenly up in arms. Politicians are feigning outrage. Class action vultures are circling. Retail banks are divesting their now toxic financial planning and life insurance businesses.
Breaking news: “Commission based sales create a conflict of interest for financial planners.“
Shock! Horror! Gasp!
This is a story as old as time, the cliché about never asking a barber if you need a haircut.
Why anybody is at all surprised that products that most enrich the seller are being recommended to the buyer?
Isn’t that exactly the way that capitalism is supposed to work?
- The customer perceives a gap in their lives.
- Whether real or imagined, the customer sets out on the path to fill that gap.
- They educate themselves, possibly by seeking advice, to identify the required product or service.
- Always adopting a “trust, but verify” approach they validate their research.
- They expend as much (or as little) effort shopping around as their level of interest supports.
- Finally, the customer makes an informed purchasing decision, having identified the right tool for the job and sourced it at the best price.
Caveat emptor in a nutshell. Or so the theory goes.
Ostrich approach, or is ignorance really bliss?
Does that mean that the consumer masses who load up on cheap nasty disposable crap from the High Street favourites like Poundland or the Reject Shop deserve to be ripped off, simply because they chose cheap over (the potential for) quality?
Had they diligently done their research? Quantified that replacing something cheap every 6 months is more cost effective than buying a better quality substitute that might last for 5 years?
Or, more likely, did they just see some arbitrarily low price tag and think “Bargain!” like the lemmings who get conned into buying more than they need by a “3 for 2” promotion at the supermarket?
How about at the other end of the market, the world of luxury goods?
Does somebody who is willing to drop £1,000 on a mobile phone handset, £10,000 on a first-class plane seat, or £300,000 on a shiny red Ferrari deserve to be ripped off?
Was their purchasing decision carefully researched to identify the equilibrium point at which the quality and cost spectrums intersect in an efficient market?
Or, more likely, were they just conspicuously consuming to impress the Joneses?
In all these examples nobody made the consumer purchase those goods. They had the ability to shop around, to take their business elsewhere, or to not make the purchase at all.
The same is true in most cases of financial services.
Ask an expert
Yet here is the thing.
The main reason mere mortals turn to professionals is to seek advice from somebody who has already done the homework.
Someone with an ongoing obligation to (in theory) remain current in their niche of expertise.
Someone with enough Professional Negligence insurance to cover their clients for any losses incurred as a result of their bad advice.
- If you want to buy a house you get a conveyancing solicitor to do the legals for you.
- If you want to get your appendix removed you get a doctor to take it out for you.
- If you want your taxes done properly you ask a tax accountant to do the job.
All these professionals are supposed to be suitably knowledgeable and competent to perform their respective functions. Unfortunately they are also only human, and if my own experiences over the last 40 years are anything to go by then a large proportion of them will be careless, incompetent and/or lazy.
But that is what there is.
The alternative is to watch a couple of youtube videos then try and remove your own appendix, applying “just in time” learning to become just competent enough to get by. Please don’t try this at home!
In the financial services world however the “advisors” are really (for the most part) salespeople. Their job is the herd the sheep into the most lucrative (for them) selection of products from the limited menu of options they have available.
Isn’t a salesperson’s job to spruik whatever product they have been given to sell?
What if the product doesn’t work, or is no good, or ridiculously expensive?
Again capitalism says this is fine.
All things being equal the expensive sellers will be put out of business by their better value competitors.
The incompetent advisors will be found out, and the ensuing reputational harm will cruel their propensity to attract new clients. This is why it is, as it should be, tough to break into a new profession. The absence of that proven track record makes purchasing your services riskier than your better-known competitors.
For mine, if a customer is too cheap, lazy or stupid to do their own homework and subsequently purchase the wrong item and/or at too high a price then that is on them. Darwinism at work.
There is a big exception to this however, and that comes in the form of workplace pensions.
Many employers still restrict the choice of platforms and funds into which an employee can invest. In those cases the employee has only bad choices: don’t invest, invest in the limited range of often expensive funds on offer, or leave the job.
In some cases things can get worse, where an employer restricts the choice to funds they themselves operate. This is pretty common in the financial services world unfortunately. In some cases those funds then purchase shares in the same company that the employee works for. Talk about concentration of risk!
…. and cattle rustling
However if a customer had sought out expert guidance, as appears to be the case in many of the case studies being reported at the financial services inquiry, and still ended up with the wrong item and/or at too high a price then that is a failing of the advisor.
If an “advisor” is a salesperson then they shouldn’t be allowed to offer advice.
Instead they should be allowed to provide an appropriately caveated sales pitch, just like somebody spruiking timeshare vacation accommodation or dubious late-night television exercise equipment.
On the other hand if they really are an “advisor” then they should be paid on a transparent time and materials basis, and not be allowed to receive any form of commission or retention or referral incentives.
Conflict of interest
The problem is the conflict of interest created where the relationship between the advisor and the salesperson becomes a commercial one. In those situations, the interests of “mere mortal” consumers are compromised, which isn’t fair to them.
Nor is it fair to the salesperson, who will have been set sales targets and KPIs. Asking anyone to forgo the potential to earn money because it isn’t in the other party’s best interests is a big ask. Asking somebody to waive off a potential sale when their very livelihood depends on making those sales is unrealistic.
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