Is our financial system broken or just designed to take advantage of the average person?
I recently read an article which posed the question: "Is your advisor wearing a product hat or an advice hat?" This got me thinking about all the discussions that have been going on within the financial services industry over the last number of years about fiduciary responsibility and commissions.
Coming from a life insurance background, I was brought up on commissions. When your income is determined by what you sell, there is a temptation to up-sell and cross-sell. Up-selling is convincing a customer to buy more than what they need or to add on extras. Sometimes it even involves selling something to someone who doesn't need it at all. Cross-selling is selling more than one product to the same customer (this is something the banks excel at).
When your income, bonuses, promotion, perks (or sometimes job) are dependent on how much you sell, there can be extreme pressure to do things you might not do otherwise. Now, before reading further, please understand that I'm not opposed to commissions. They work well in certain industries, but I really question the benefit of commissions when dealing with financial products.
The vast majority of the public are financially independent. Most, thankfully, are not looking for financial handouts. What they are looking for is financial advice. According to the last financial literacy study, most Canadians are financially illiterate! Who has taken on the responsibility to educate the public? The education is provided by the very institutions that have the most to gain from the public's lack of understanding. Banks, insurance companies, mutual fund dealers, investment dealers, credit unions and trust companies are all there to help us out with our money.
Every one of these institutions is by design a retail operation with sales staff available to answer our questions and make the sale, whether that is the bank teller or the stock broker. The problem I see is that most people have no idea what they are being sold, or what this product or service will end up costing them, either in commissions or lost opportunities.
When we shop for things, we expect to be up-sold. If we're going "shopping" we may talk to a number of salespeople to get their advice about a particular product or service. Once we have enough information we make a decision. If you walk into a car dealership and ask if they think you need a new car, we can predict what the response will be. This is the same situation when you walk into a financial institution, however, many people don't recognize the similarities.
When you go to the bank to make a deposit or pay a bill are you expecting to be sold? Probably not, but it happens all the time. Have you ever asked about contributing to an RRSP? Were you given all your options or were you simply put into a GIC or mutual fund? Did it cost you anything?
Most people who work in the financial services industry are wearing sales hats; few are wearing advice hats. This, to me, is a systemic problem. Most people go into these institutions believing they're getting financial advice, while almost all are being sold.
Commissions, which naturally create conflicts-of-interest and a lack of fiduciary responsibility, are going to be with us until the system is changed to help the average person get ahead, not get left behind.