The Condescension In The Financial Industry Continues To Bother Me

In order to persuade someone of something, there are two things you have to do right: you have to have the right message, and you have to deliver the message in a persuasive way such that the person on the receiving end of what you are saying inevitably thinks, “Why yes, you are like me, and people like us do end up doing things like that.”

I’ve been spending part of my day watching Youtube videos of financial managers and planners talk about the advice that they give prospective clients, and while I don’t want to single any of them out, I will share with you my general impression: even though a lot of them get the abstract advice right about avoiding fads and mentioning the inherent advantage of low-cost index funds, their method of delivering the message is terrible.

Why do I say that? Because they talk to the lay investor as if we are mentally incompetent and unable to understand the adult notion that decisions involve trade-offs. They say things like “retail investors only pick faddish stocks” and “individual investors panic sell as soon as their stock declines 10%” and they present this information in a tone that suggests they are the mature overseers with Buddha-like discipline while the rest of us are the great unwashed masses that somehow got our hands on $1,000 and can’t be trusted with it for another moment longer lest we buy some shiny object, and so we better hurry up and give it to them.

It would be much more refreshing if someone came along and said things like, “Low cost index funds are inherently hard to beat because indices like the S&P 500 consist of many of the superior businesses that you might select if you did your own investing, and the negligible fee amounts protect index investors from ever losing big due to one big, ill-timed bet.” Or “Typical large-cap American stocks tend to deliver returns in the 10% range. There is a catch, however, to receiving those 10% annual returns: about once every three years, you will see the total amount of money to your name decline, and about once per generation, it will decline by a significant amount and quite quickly. You get to decide if you find those terms acceptable.”

Even at the individual level, it would nice if there were some conversations had on the trade-offs between growth and income, something along the lines of: “Let’s say you have $10,000 available to invest. If you invest in AT&T or Royal Dutch Shell, you will get high current income that really does amount to something nice if you reinvest, but unless you get those stocks at a discount, the odds are unlikely that you will underperform the S&P 500. Likewise, if you choose to reinvest in Disney or Visa, there are very good chances you will beat the S&P 500 Index funds over the coming fifteen years, but that growth will manifest itself in a high net worth rather than high current dividend amount.” And then, after laying out both sides, the customer would decide which is more appropriate.

Who knows? Maybe these guys are more charming and personable when you visit them at their business offices than when they are speaking broadly to an interviewer about retail investing in general. But my impression is that the investment industry needs a lot more people who truly “get” their clients and can break down the complexity of investing into a series of questions yielding to different outcomes based on asking you about your personal preferences.

Instead, it seems that all financial managers just assume that every investor want to hear a clichéd bromide about how he will make them money in a “safe” way, without any particular conversation about the style in which the money gets made.

I do realize, of course, the inherent contradiction in what I just said: The kind of people who don’t want to think about the nuts and bolts of investing aren’t going to care about the process of creating wealth, and the kind of people who care about the process aren’t going to outsource all of their money to a third party.

But when people talk about “Main Street investors panic selling” or “always buying at the top”, my guess is that a lack of communication and proper empathy between the financial advisor and the client is a part of the process. Like I’ve mentioned before, if I were in the business, I’d make the client take a walk with me through Wal-Mart before deciding to sell.

Want to get rid of that Procter & Gamble stock because the price fell to $50? Okay, but first, you are going to have to walk with me through Wal-Mart and observe all the Procter & Gamble products sitting on the shelves. Then, you would have to go through a dividend reinvestment history through Procter & Gamble during the 2008 & 2009 financial crisis in which you see that those reinvested dividends created more wealth and higher income than when P&G’s share price came out of the recession. If that didn’t prove persuasive, well, you can only do so much.

I would be a lot more impressed with the financial industry if they didn’t assume their clients were stupid/emotional, and if someone is either stupid or emotional, they would take the time to explain why a client’s emotions might be getting the best of him without sounding patronizing.

/Rant over./

 

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5 thoughts on “The Condescension In The Financial Industry Continues To Bother Me

  1. Jonnydee83 says:

    My question to experts like that is “if you’re so smart and have such a great track record then why are you so interested in managing peoples $27,000 IRA’s? Shouldn’t you be managing a $ 4 billion hedge fund with all your talent?”

  2. says:

    Good article Tim.  As an ex-fund manager myself I agree with much of what you say here.  For all their condescension I would say institutional investors are just as bad (sometimes worse) than retail investors when it comes to letting emotions rule their behavior!

  3. Paul N says:

    I will attempt to take a stab at a response to this…

    I have to agree and disagree with your “rant”. There are very simple reasons why.I don’t believe it is condescending to state that the vast majority of people are their own worst enemy when it comes to investing. The was a stat here just released in the country where I live that the average Canadian carries over $20,000.00 of non mortgage / non automobile debt. (mainly high interest credit card debt). That tells me a lot of people don’t even understand how to keep a household budget under control, let alone even think about starting any type of investment whatsoever other than a lottery ticket purchase.

    Secondly the marketing of the many levels of financial products is very powerful. Just consider the MLM investing companies out there PrimeAmerica, World financial Group for example. They are large companies attracting “low information” clients and they are hugely successful. Usually through trusting friends and relatives to start. Exactly the type of people that should be index investing. Lets go one step further and step outside of your “financially literate” group of friends for a minute. If I take 10 random people walking down the street I will guarantee that 9/10 of those people could NOT tell you the difference between a bond, a stock or an ETF. Or what the significance of an MER, Front load or Rear load fund means.I work with 75 people at my place of work. There is only one other person then me in 75 that has any interest and any knowledge at all about investing here. Most of them think I’m a guru or boring or this rich guy (which I am not).

    The people who sign up for your posts to be delivered to their e-mails automatically are mostly already people who have taken the first steps to financial literacy. The 1 in 10 that seek knowledge are the ones coming to your website the other 9/10 would never find you and if they did would think YOUR the rich condescending guy speaking a foreign language. They feel they could never be a successful investor.

    So I agree with your principles, and I personally like dividend investing even though I realize there are other forms of investing that are also valuable. One part of dividend investing (even though its a bit of BS) that I think is important is a new investor can start by buying $1000.00  of say a monthly distribution paying ETF and immediately get a small gratification by seeing $0.40 cents in his account at the end of the month. (although the share value dropped equal to the payout – on the payout day – which is the BS part). But it could make someone excited about that fast growth (we live in an age of instant gratification) and may want to invest more as every month you see your little “payout” growing quickly. Then from there your attn. to investing may grow and with it your financial knowledge.

    But for the most part I’m sorry to say most people make horrible investment choices, not because they aren’t intelligent but because they are tricked, they are intimidated, headlines like Bernie Madoff don’t help, and simply a large number of “advisors” put their interests before their clients. How many people have you heard investing being compared to “a casino” during a conversation? So any person stuck in any of these situations would yes…. be better off index investing at the lowest cost possible.

  4. Paul N says:

    You removed my comment, I have to say i am surprised. No explanation why. I would have thought you would entitle everyone to an opinion even if it did not agree with yours.

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