Far too often, financial middlemen, more commonly known as advisors, do not connect consumers with the products they really need. The information that many “professionals” provide can be very conflicted and non-transparent.
According to the author John Kay, the way financial advisors provide advice is more similar to, “the tourist guide who directs us to his uncle’s carpet shop; the fixer who provides no valuable service but can frustrate a transaction unless he receives a cut; the doctor who recommends a battery of tests we do not know or need. Bad intermediaries exaggerate their own skill and our need for their services by imposing complexity on us.”
There are many reasons for this. If we look at the characteristics of a good middleman in any industry, we can clearly see these qualities are clearly lacking in the financial industry:
- Middlemen need to identify goods and services consumers want, and find the best ones at the lowest prices.
- Middlemen need to properly manage the supply chain to avoid bottlenecks.
- Middlemen need to provide information and advice so clients can make good decisions.
- Middlemen need to make complex things easy to understand.
Advisors provide advice and serve as an intermediary between clients and investment products. If we look closely, too many advisors fail in the above stated objectives.
Often advisors sell high-cost, actively managed funds that underperform the market. They ignore index funds because they will not receive a good payout on them.
Too many advisors will feed both greed and fear that dominate the decisions of many investors. During the technology boom of the 1990s, many fund companies came out with new funds to exploit this bubble, instead of shutting the overheated sector down by closing existing ones.
Many advisors gladly jumped on the bandwagon by actively marketing these products. The supply chain was broken, by at first creating too much demand; and then, having no buyers when the bubble eventually burst. This behavior was a poor display of supply chain management and is far too common during the endless series of market booms and busts.
Most advisors act under a suitability standard rather than looking out for their clients’ best interests as a fiduciary. This conflict suppresses facts and provides advice that leads to poor decision-making by clients. Too many investment products are sold, and not bought on their own merit.
The endless use of jargon by many advisors complicates and confuses the decision-making process of their clients. There are few industries where this is more common. In the words of John Kay, “Inter-mediation at its best hides a complex mechanism with a simple interface – like the face of a watch.” Conflicted advisors are more like the first personal computers which required expert programming skills to get them to perform basic functions.
Walmart does a much better job as a middleman than most major financial firms. Maybe clients should be able to buy index funds in aisle 7!
On a more serious note, a system that benefits the middleman more than the client is a system that needs to be changed.
It is a shame that the market for vacuum cleaners and dishwashers is more transparent and consumer friendly than financial transactions involving trillions of dollars in retirement accounts.
Source: Other People’s Money by John Kay