“Happiness and moral duty are inseparably connected.”
When I was at West Point, we had to learn a lot about the traditions of the Academy. Some of it was rather arcane (“How’s the cow? Sir, she walks, she talks, she’s full of chalk! The lacteal fluid extracted from the female of the bovine species is highly prolific to the nth [referring to the number of milk cartons remaining on the table] degree!”), but some of it was meant to be inspirational and motivational.
One of the inspirational pieces that we had to memorize was one of the paragraphs from General Douglas MacArthur’s final speech at West Point.
Duty, Honor, Country: Those three hallowed words reverently dictate what you ought to be, what you can be, what you will be. They are your rallying points: to build courage when courage seems to fail; to regain faith when there seems to be little cause for faith; to create hope when hope becomes forlorn.
I’m not trying to ring the moral bell or play “who’s more moral” with my beliefs. However, for a long time, I’ve had a sense of moral duty instilled in me. As someone once told me, righteous anger is the fieriest anger.
That’s why I’m such a strong believer in fiduciary duty. When commissioned advisers take the uneducated for a ride, all they’re doing is, in my opinion, stealing money. Yes, I said that. I believe that if you’re a commissioned mutual fund salesperson, you’re stealing money from your clients.
As many of you know, I’m a big fan of knowing your Monkey Brain so that you can tame him and keep him from rattling his cage and throwing too many bananas while you make your way through your life. What I’ve wondered was what makes the Monkey Brains of people who uphold a fiduciary duty different from those who don’t have one.
The first area is in the nature of our rewards. Even advisers who have a fiduciary duty have to put food on the table. Mine’s pretty transparent. I get rewarded in two ways: my hourly rate and when people enroll in myFinancialAnswers. I’ve had a couple of financial planners who use an assets under management model remark that I’m never going to get rich using my business model, to which my response is “no ****, Sherlock.” One can make a perfectly good living going this route, but if I had wanted an eight digit net worth, I’d have gone into investment banking right out of business school.
The other side of the coin sees advisers getting paid either through commissions of the funds that they sell or through taking a percentage of your assets every single year. When commission-based advisers aren’t bound by a fiduciary duty, they’re more prone, as research from Harvard’s Santosh Anagol shows, to sell products which are in their best interests, and not in their customers’ best interests. In other words, they’ll sell the highest commission product without regard to whether or not that product is the most appropriate for the customer. The less sophisticated the customer is, the more likely the salesperson is to sell an inappropriate, high commission product.
As we have seen previously, though, disclosure of conflicts of interest (which commissioned based salespeople are rife with) actually makes you trust the salesperson more. In Anagol’s study, commissioned salespeople were more likely to parrot the incorrect beliefs of their customers to help the chances of the sale.
Is this a product of greed? Partially, but two other studies point to other reasons why commissioned salespeople look out for their best interests first.
The first is a study by Duke’s Dan Ariely that shows that people who have the opportunity to receive high amounts of a reward do well in simple, rote tasks, but have a much greater difficulty in performing tasks which are complex or require creativity. Think of the difference between, say, Michael Jordan making a free throw or Lionel Messi scoring a penalty kick for the championship, and you being asked to puzzle out the final question on Who Wants to be a Millionaire. They’ve practiced thousands of times to where what they do is reflex and muscle memory. The contestant with the final question is being asked to solve an extremely difficult question, almost invariably without the help of a lifeline. We thrive when asked to perform repetitive tasks – you could hit a mouse button extremely quickly if asked to – and don’t do well when asked to perform complex tasks when the stakes are high. Thus, a commissioned salesperson, who has the opportunity to make a significant amount of money if he can sell said products, is going to make the same pitch and sell the same few things. These salespeople will almost never veer into actually providing in depth financial planning because financial planning requires complexity and creativity, and the pressure of a large reward will get to them, and their performance will suffer.
The second reason is that the salespeople will work to create a closeness with their potential customers before making the sale so that the customer won’t view the salesperson’s work as immoral or dishonest. As research from the University of North Carolina’s Francesca Gino shows, when a person is psychologically close to someone who acts dishonestly or unethically, that person is more likely to rationalize the dishonest or unethical behavior – “he’s a friend! He’s not so bad!” Even the most marginal of psychological connections, such as sharing a birthday, can create this feeling of closeness and help the aggrieved person to feel like the malicious behavior was justifiable.
We’ve explored the dark side of Monkey Brain. What about people like me, who live by a fiduciary duty and, in our choice of business model, forego potentially vastly lucrative options?
There are two primary motivations for why we choose the path that we do.
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The first is that we are trying to achieve eudaimonia. We’ve previously discussed how the pursuit of happiness should influence your money decisions, and for me and those who pursue a similar path, we’re doing the same thing. There’s more to life than happiness, and although money can buy happiness, there comes a point of diminishing returns. Once you have enough, you look for other things in life, like connectedness and serving, to broaden the scope of your joy.
The second reason is one that Wharton’s Adam Grant has explored – people who give feel richer and feel like they have more to give. With our clients, we’re giving because we’re not extracting the maximum amount of profit that we can per client, unlike the commissioned salesperson who sells the highest commission product regardless of the suitability for the client. We’re not in it to make a mint; we’re in it to help, and through helping, we feel connectedness and fulfillment. We undergo the same psychological benefits that happen when we give to charity, which I explained in an article on Jean Chatzky’s website. So, we benefit – monetarily enough that we can feed our families and so that you, as the purchaser, value what we provide – but we also benefit psychologically since we’re giving some of the value of our services to our clients.
How does this impact you?
Unfortunately, all of the same psychological connections which would make you trust someone who has a fiduciary duty to you make you trust someone who doesn’t have a duty to you.
We all want you to trust us. As I explained in my article “Why Me Caring About You Makes the Medicine Go Down Quicker,” sometimes, we financial planners are going to have to deliver some bad news. It’s usually in the form of telling you that you’re either not going to be able to reach all of your goals or that you’re going to have to pare back your current lifestyle to make sure that the Future You doesn’t have to go dumpster diving for dinner on a regular basis. If we don’t build up trust with you, then you’re much more likely to throw away that advice as meaningless.
The same goes with the commission-based salesperson. He wants you to trust him so that you’ll be more susceptible to his sales pitches when he tries to sell you high commissioned products that probably aren’t good for you, but are very good for him. So, he’ll ask you about your family, your kids, your hobbies, anything that he can do to create that psychological connection which will cause you to give him a pass when he sells you a high commissioned product. I cannot tell you the number of people who have been sold high front load mutual funds, saw their portfolios suffer, and then told me they’d have trouble calling the “investment adviser” who sold them that load of junk because “he’s a nice guy” or because “I like him.” Monkey Brain likes to avoid conflict wherever possible, unless it’s when you tell him that he can’t have more bananas.
Another issue is that when the commissioned salesperson discloses that he’s going to make a shedload of money off of you, it increases your trust in him. As we saw in the article “Why a Broker Who Makes Commissions Off of You Doesn’t Help You by Disclosing His Conflict of Interest,” not only does this disclosure increase trust between you and the salesperson making the disclosure, but it also gives his Monkey Brain the feeling of moral leeway. He’s gone beyond the call of duty (so to speak) in disclosing, so his Monkey Brain feels quite justified in blurring the lines somewhere else, namely in stuffing his pockets rather than serving you.
But wait! There’s more!
Since the commissioned salesperson has worked to build trust with you, finding common ground and disclosing his conflicts of interest, you’re more likely to forgive him when you find out that he’s been raiding your wallet like a Hun marauding through Europe in the Dark Ages. Have you ever watched television when the police catch a bad guy and the reporters interview the neighbors?
What do they all say?
He’s such a nice guy! He could never be a [seal clubber/car thief/Justin Bieber lookalike]!
They’re all ready to deny that he really was the culprit. Why? He was a neighbor. They feel a psychological closeness to the criminal, no matter how trite the connection. Because of that connection, they’re willing to forgive.
So are the people who are taken in by the chart porn of the commissioned salesperson.
What can you do to stop the madness?
There are three main things you can do to sort the wheat from the chaff and make sure that you’re being served by someone who truly cares for your best interest and doesn’t just say it while digging around in your wallet.
- Become educated. The previously cited Harvard study showed that when potential customers were more sophisticated, the commissioned salespeople offered products that were much more appropriate and were less egregiously high commissioned offerings. If you go into a strip mall “investment advisor” franchise with doe eyes, they’re going to spot you coming and circle you like vultures. Knowledge is your best friend.
- Comparison shop. In that same study, when commissioned based salespeople thought that there was strong competition for a potential customer, they, again, provided much more appropriate recommendations. A sale with a little commission is, after all, better than no sale at all. Even the threat of asking around will get anyone to tighten up his pitch. If you need some questions to ask, you can use the guidelines I provide in “The Four Questions You Should Ask BEFORE Hiring a Financial Planner.”
- Actively question the truth of what the person is telling you. Monkey Brain believes everything he hears, and you have to take steps to overcome that initial gullibility he has in order to get to the truth of a matter when you may be being deceived.
Although no study currently exists to check the MRIs of people who receive advice from someone with a fiduciary duty compared to someone without a fiduciary duty, performance of loaded mutual funds and actively managed funds compared to the overall market and to their appropriate benchmarks leads me to the conclusion that there is no way that you’re better served by someone who is a commissioned-based salesperson. After all, their interest is to line their pockets, not yours, no matter what they say. Don’t fall for the psychological traps that they will spring, and your wallet will thank you.
Do you think fiduciary duty matters? Have you tripped up and fallen for some of the psychological tricks that commissioned salespeople will pull on you? Let’s talk about it in the comments below!
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