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How financial advisors lie to themselves


(MoneyWatch) I'd like to offer you a glimpse into my profession that, hopefully, will help you recognize what to watch out for and what well-intentioned financial advisors may do to you. This isn't a story about fraud; it's a story about being human.

While at a breakfast of financial planners a couple of weeks ago, it was mentioned that I write a column. The very nice woman to my left asked what I write about. I responded that it's mostly about what our industry does to separate consumers from their money and that I never had a shortage of topics.

The woman, a CFP practitioner who owned a franchise of a national firm, responded in an absolute acknowledgement that many advisors take advantage of clients. Before going on, I can tell you this was an extremely nice woman, with two small children, who does a ton of volunteer work for her church and community. I can also tell you that she sells some of the most expensive products on the planet that, not surprisingly, have been the subject of many of my articles.

Trying hard to bite my tongue, and failing as I always do, I asked her if she sold private REITs (Real estate investment trusts). I made sure to refrain from offering my opinion on them which, considering that they paid great commissions to advisors with disastrous results, wasn't positive. She said that she did. In what I suspect was a preemptive attempt to head off any criticism she was sure I was getting ready to offer, she claimed that no client had ever lost money on her REITs. Then she admitted that she sold a REIT I have written about by the name of Inland Western that went public in 2012 at a 64 percent loss from the purchase price. She was a bit less friendly as she noted one client in particular demanded a REIT that owned retail properties. The implication, of course, was that it wasn't her fault.

Now I'm not exactly Mr. Sensitivity, but as her manner grew increasingly frosty, even I knew I had offended this nice woman. So, I changed the subject and started talking to others at the table, hoping the presentation would start really soon. Before it did, however, the planner turned to me and said that every client is different and different products are needed for each individual. While I recognized she was trying to justify her actions, I loosened up that bite-grip on my tongue and told her I agreed with her, but low costs, diversification, and liquidity were required in every consumer financial product. Let's just say that my comment did not endear me to her. If looks could kill, I would be writing this column through a medium. Yet again I had succeeded in cementing my position as the least popular financial planner amongst my peers and, yet again, proved my wife right that I was the least tactful person on the planet.

My take

I'm quite sure this woman left that breakfast with nothing more of a thought than she just happened to sit next to an argumentative jerk. She justified what she was selling as only giving the client what they wanted. If it turned out badly, it was the client's fault. In her mind, I'm quite sure she felt she was exercising the fiduciary responsibility of putting her clients' interests ahead of her own.

But it is the fact that we feel so strongly that we are a force for good to our clients, community, and church or synagogue that makes us so convincing in winning your trust and selling you products much better for us than for you.

Am I any better? The fact is, I could only exercise true fiduciary duty of putting my client's interests ahead of mine by lowering my hourly fee to zero. My mindset might be different if I were in the same position as this planner with two small children I wanted to send to college. Necessity isn't just the mother of invention, it's also the mother of self-rationalization, and necessity might have me thinking that an annuity for your IRA is an awesome idea.

Dan Ariely, author of The Honest Truth About Dishonesty, says there are some things investors can do to keep advisors more honest. For instance, ask us to sign a pledge that we are putting your interests ahead of ours and have us sign it every year. This at least would get us thinking about your interests more often. And make sure you are supervising us by demanding to understand everything we do.

To err may be human, but so is lying. What makes it complicated, though, is that we advisors must first lie to ourselves to make our lies to you more believable.