I recently spoke to a group of high school students who had indicated their desire to one day have a career in the investment business. I began by asking how many in the class wanted to be sales people? They had a puzzled look on their faces, and not one raised their hand. They wanted to help people with their investments, a great career path in my opinion. When I explained that the vast majority of people helping others with their investments were compensated as sales people they were suddenly rethinking their career objectives. This was news to them. But the sad fact is that it is news to most adult investors who make investment decisions after listening to a sales pitch. Sadly, that sales pitch was offered as investment advice.
Most industries, businesses etc. produce products and/or services, and they create a sales force to sell those products and services. Compensation in the form of commissions is what provides the incentive to sell, and the more you sell the more you earn. It works, and it should. Most commerce around the world functions this way. And in most cases, the customer is well aware that they are hearing a sales pitch regarding the merits of the sales person’s product vs. a competitor’s product. The customer is not expecting “objective” advice.
When you go to a Ford Dealer to look for a car you expect the sales person to try to sell you a Ford. You are not expecting an objective analysis of Fords vs. Chevrolets, and that is how it should be because the sales person works for the Ford Dealer. Whatever the product is, the sales person is “selling” not giving advice.
The Financial Services Industry is no different. They manufacture and sell a wide variety of investments products. Their sales force is compensated by how much, and what product, they sell. And as with any sales effort, the most profitable products carry the highest payout to the sales person. They can’t make money selling Short-term T-Bills. Every company wants to be as profitable as possible, and their entire sales strategy is constructed accordingly. But when that sales pitch is called “objective investment advice” it is dishonest at best, even if it is legal.
Fortunately, investors today do have a choice. They can engage and pay an independent fee-only investment advisor. The advisor works for, and is paid by, the investor. This relatively new profession enables investors to get truly objective investment advice. I am hopeful it is also good advice, but at least the investor knows the advisor has no incentive to provide anything other than their best advice. No more conflicts of interest.
And those students who did not want to be in sales, they were very pleased to know they can pursue their career goals without having to compromise themselves to earn a commission.