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Some professional advice is better than no advice, most of the time.

Unlike most self-help books, I do believe that professional advice is a great thing. I am talking about mortgage brokers, financial advisers, insurance advisers, etc. I am also going to go against the trend and say that having professional advice is better than no advice, most of the time.

This shocks a lot of people when I tell them this, especially those that believe in taking charge of one’s life. I am all about self-empowerment and self-improvement, and in almost every facet of my life I try and learn the ins and outs so that I can do things myself. Or, in the worst case, at least I understand the principles of whatever I am doing.

But, here is the truth, most people won’t take action themselves. A professional will make them take action. Seemingly ‘poor’ financial advice is still better than none. I see it day in and day out. Without financial advice people do what you would expect them to ... nothing! I personally have an adviser. Is it because I actually require the financial knowledge or know-how? Not at all, but it is a wonderful sounding board when I have questions or thoughts. A second pair of eyes is always nice.

Choosing an advisor

If you are new to trying to learn about personal finances, then I strongly encourage you to take the leap and contact a financial adviser. The only thing I recommend is that you find someone who has reviews and has a lot of money under management (tip - just ask them how much money they are managing; they will tell you!). The reason for this is you want to find someone who doesn’t need you as a client. What you are looking for is someone who already has a client base where they see you as transaction and not a means to eat that evening.

‘But David - doesn’t that mean the adviser doesn’t care?’, you may ask.

Of course the adviser cares - they care about implementing their system which they have seen work time and time again. Will it be the most optimal? Probably not. Could you do it yourself for cheaper? Probably. Are they going to sell you something that makes them a lot of money? Maybe? Might they, potentially, guide you towards products that might not be 100% ideal for your situation? Potentially. (You will see I ask these types of questions often in my writing. I have heard every question in the book, at this point, so I want to address as many as possible.)

But will you actually execute on a plan you create yourself? Probably not.

Does this mean you should stay away from them? Definitely not. Any type of savings and investments will be better than nothing. Math focused financial gurus will focus on MER’s, expense ratios, historical returns, etc. All of this is absolutely meaningless unless you actually start investing. What your chosen financial adviser tells you to invest in, as long as it makes sense, will be better than whatever you are doing now.

My only caution - never sign up for anything the first time you meet with any professional. Take a few days to digest the information. Pull out this book and see if there is anything regarding the topic in Chapter 13. If there is, great, read it, and see how it compares to what your adviser told you. If all checks out, then you are probably safe.

I am not trying to claim that all advice from a professional is good advice. Quite the contrary - as you will see, professionals can sometimes be incentivized to work against your best interests. However, if you are new to everything, some advice is better than not doing anything at all. If at any point this chapter becomes overwhelming please feel free to skip it and come back to it. While it is critical to understand, it can wait.

Understanding the conflicts

It is important for you to understand the conflict that exists in every area of the financial sector. Here is the truth: unless you are paying your professional out-of-pocket, and that is their only source of income, there exists a conflict of interest in one-way, shape, or form. This doesn’t mean everyone is out to take advantage of you; but, it is important to know because it will allow you to make more educated decisions.

Understanding how someone gets paid (and it could be anyone) will allow you to quickly know whether or not someone is truly 100% dedicated to you or if there is another angle they may be looking at. For example, a company may have a referral relationship with another firm that pays them a referral fee.

The company has a conflict if they are more likely to refer you only to the company who will pay them the referral fee. Does this mean that this is bad? Not necessarily. But, it is important to note! If you can save money and the company gets a referral fee, it is a win-win for everyone.

While reading the rest of this chapter, please realize that I am a big advocate for using financial professionals. My intention for the remainder of this chapter is to make sure people know how compensation in the financial industry operates so that you can make better informed choices.

How financial services get compensated

Most financial professionals, regardless of whether they are on a commission structure, an hourly rate, or are salaried, carry some type of bias towards their products. It might even be an outright conflict of interest. Let’s break these down:

Commission: This type of structure involves making more based upon how much you sell. For example, a car dealership will pay their salesman a percentage of the sales price of a vehicle for every sale. A mortgage company may pay a mortgage brokerage 1% of the mortgage value and from that pay out a percentage of it to the mortgage broker who gave you the mortgage. An insurance company may pay an insurance brokerage 50-110% of the first year’s annual premium on a life insurance policy. The insurance brokerage will then pay out a percentage to the salesperson who sold you the policy.

Hourly Rate/Salary: This type of structure is how most people are paid. They are either get paid a salary or an hourly rate based upon how much time they put in. Sometimes there are bonuses they can earn as well.

Now, you may be thinking, where exactly is the conflict in the two above-noted payment structures? Well, one of the obvious conflicts with commission-based selling is, that if they sell you more, they make more. With hourly staff members that receive bonuses they could be incentivized to sell more to achieve their bonus. What this means in plain language is that you might be sold something that isn't the perfect option for you. These structures do not exactly mean that a salesperson will take advantage of you. Remember, the key is to work with someone who doesn’t need your business.

What would shock most people to find out, is there are much more devious ways that companies entice their sales force (whether they be commission, brokers, employees, etc.) to sell more for them.

Other forms of compensation in the financial services industry

There are a significant number of ways that financial services professionals get paid. Companies run contests, promotional offers, volume bonuses, accuracy bonuses, etc. Let’s go through a few of these:

Contests: Contests are a way that companies excite their sales force. It could be ‘Sell 50 sofas this month and win a trip to Mexico’ or ‘For every sale you make, you are entered in a chance to win a big screen TV’ or anything similar. This one seems harmless enough but it is truly implemented to influence the salesperson to sell more. It may be a general contest for a top salesperson or it might be for a specific product. Sometimes, what this means is, the individual may be more likely to push you to buy a product that doesn’t fully suit your needs, because they can win a trip to Cancun if they sell that product over another.

Promotions: I see this one all the time in the mortgage brokerage industry. Lender A may be the better product but only pays 80 basis points. Lender B is the subpar product, but is offering a promotional payment of 120 basis points. Without a doubt this would incentivize the broker to put you with the lender who pays them more. All things equal, this is a harmless way of incentivizing a salesperson to use the promoted product, however, things are rarely ever truly equal.

Volume Bonuses: Sell more = Make more. That is exactly what the volume bonus means. For example, if you sell $10,000 worth of goods, we will pay you 10%. So, $1000. But if you sell $50,000 and above we will pay you 12%. So, $6000. You see, you just made an extra $1,000 just because you sold more. The motivation is for people to sell you more because it adds to their pot, which makes more money for them!

Accuracy Bonuses: This concept is mainly relevant to mortgages but can be found in other industries too. An accuracy bonus is awarded based on how accurately a professional selects a company for their client. Companies aim to reduce their workforce and spend a lot of time vetting deals. In the past, brokers would randomly match clients with companies to see which one would provide the needed product. Instead of knowing which company would best meet the client's needs, they would experiment to find out. While this might not seem problematic, I have witnessed professionals avoiding helping individuals because they believed nothing could be done and helping the client might impact their deal accuracy. However, the client might find another professional willing to take a chance, ultimately helping the client achieve their goals.

The problem with all of these extra incentives is that the consumer is looking to approach a professional because they are seeking professional advice. Knowing the conflicts and incentives listed above, the problem that the consumer might face is that the salesperson may not be looking out for the consumer’s best interest, but their own instead.

Now, as mentioned in the beginning of this chapter, professional advice is better than no advice, most of the time. So don’t use this section to become scared. Rather use it is a tool to better understand what motivates the person sitting in front of you.

We have already covered a mortgage broker, so let’s look at a few other examples. These don’t even need to be in the financial services industry. They really apply to any industry:

• A car dealership has an overstock of a certain vehicle model. They may provide an incentive to their salespeople to sell those rather than other models.

• A bank may want to push a new financial product and provide their call center employees a small bonus for every one of them they sell.

• An insurance company may offer its sales force a trip if they sell X amount of policies.

• An employee may simply have quotas that must be met. *We didn’t cover this one above, but they exist in almost every business.

We could really go on and on with the examples. These exist because businesses need to make a profit and the way they make more money is by either incentivizing their sales force or incentivizing you to purchase more product.

My goal is not to paint a negative light on this topic. The take-away from this section is simply to understand what may be influencing the salesperson sitting in front of you to offer whatever they are offering you. By being educated on how people make money in the financial services space you will become a better negotiator, make better decisions, and not let others take advantage of you. This simple understanding can really go a long way in making better choices.

Wrapping everything up

Now that you understand how financial services companies are compensated, we must go back to a topic that we are covering in nearly every chapter. That is, Action is better than inaction. To be more specific, action, when you are properly educated, will almost always be better than inaction. You don’t need a Ph.D., nor do you need to study finance to become educated enough to make sound decisions. You hire a mechanic to fix your vehicles, a contractor to do renovations, an electrician to wire your house, and you should have financial professionals to help you improve your financial life.

Might they have a bias? Yes.

Might they not offer you the best product for you? Sure.

Will they make money off of you? Yes, they should or they could not help you professionally.

Might you find a better product elsewhere? Maybe!

But the fact is, by not taking action, you will continue to live the same life you have lived to date. You are most likely your own worst enemy. So take charge of your life and take action on the items you desire. Do you want to set up retirement savings? See a financial planner and set up an investment account. Are you looking to buy a house? Go see a mortgage broker. You might need life insurance. Verify with an insurance agent.

The biggest fear that people have is that they may run into someone that is trying to ‘scam’ or take advantage of them. The financial services industry is one of the most highly regulated industries in Canada. The chances of getting outright scammed is exceedingly rare. Of course, we can never say never so that is why I recommend working with someone you trust. Ask for a word-of-mouth referral from friends and family. I also recommend, if you can, to work with the owner of whatever financial services company you may be working with. Oftentimes the junior salespeople are ‘hungry’ for business and need to make the sale as you may be their only potential client. This can sometimes lead to bad advice. By working with the senior salespeople you will get much better advice, paired with a less pushy sales process.

Practical Exercise

If you have been wanting to accomplish financial goals for a while, take the time to reach out to a few professionals and schedule in time to speak with them. If you have been looking to:

• Buy a house: Reach out to a realtor and mortgage broker

• Set up retirement savings: Contact a financial advisor

• Set up insurance: Contact an insurance advisor

Or any other professional that might be related to what you are looking to accomplish.

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