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The Financial Yes Man/Woman Dilemma

October 15, 2011 By Christy Gregory

While experts have long counseled against using financial planners who push products and receive commissions (given their incentive to simply sell products which may or may not be in your best interest), it turns out there is another risk that afflicts advisors of all kinds – including fee-only advisors (such as myself).

A Harvard professor and top behavioral economist, Sendhil Mullainathan, co-authored a study that asserts that many financial planners are just “yes” men and women.

It turns out that many planners reinforce bad investment behaviors instead of fixing them. And the problem, according to Mullainathan, may be harder to solve than the fee issue.

Mullainathan, a MacArthur “genius” grant recipient, and his co-authors hired actors and had them visit planners in the Boston area on nearly 300 occasions, pretending to seek financial advice.

The actors were armed with one of four distinct fake portfolios: One group was heavily invested in index funds; another entirely in cash; a third claimed to be seeking the next hot market sector; and the fourth said they held 30% of their savings in their employer’s stock.

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 secure fixed income funds.

The most telling result came from the actors loaded with company stock. Just 40% of the planners told them to sell the stock and diversify their portfolio, even though the move would in the client’s best interest (remember what happened to the employees at Enron, Lehman Brothers, etc.).

The results illustrate that even fee-only planners need to get business in the door. As a result, many advisors will avoid difficult conversations with prospective clients.

So how do you know when you’re getting good advice from a planner, and not just what he or she thinks you want to hear?

You need to work with a financial professional who challenges your ideas, rather than echoing them.  

How does this relate to my practice and the financial advice I give to clients? First, I didn’t come to be fee-only advisor through the normal trajectory (as a broker or an insurance agent who decides to change their business model). I came from outside the industry so I did not inherit this bad habit of being a yes person from some left over sales training.

Secondly, I always strive to give you my honest and straightforward opinions and recommendations – even if they are not what you want to hear.

Third, as a Registered Investment Advisor (and thus a fiduciary), I have to do what is in your best interest at all times – period!

Filed Under: Financial Planning, Investment Education

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