The Problem and Financial Bias with Investment Advice
Executive Summary
- Investment advice is filled with financial bias.
- The investment industry does its best to hide this financial bias.
Introduction
The use of salespeople rather than real investment professionals in retail financial branches is covered in the following quotation.
“Say you decide to go down to your local brokerage and meet with a financial advisor. His (or her) pitch sounds good, so you decide to become a client. The first problem is the guy you met. Remember how he told you he has his finger on the pulse of the market, he has access to the best investment research, he is always taking continuing education classes, and he is always monitoring your portfolio? He isn’t. He could be a complete moron. He got hired (and survived and thrived) because he is a good salesman. Nothing less and nothing more. He takes his orders on what to sell from the top — the gaggle of people with their fingers in your retirement pie, helping themselves to regular bites. The first person behind the scenes telling our hapless salesman what to do is some sort of office, district, or regional manager. This is a manager is just like the salesman but with more ambition. Almost all of these guys were promoted from sales, and their job is doing an impersonation of Alec Baldwin from Glengarry Glen Ross, yelling at the underperformers (“Coffee is for closers!”) to get out there and sell the turd of the month. (“XYZ Mutual Fund Company just paid our firm $200M,” this manager says, “so get out there and sell their funds! And, Jones, if you don’t gross $20,000 by the end of this month, you’re fired! Meeting adjourned.”) Neither of these two friendly fellows actually does much, if anything, in the way of actual investing. Sure, they learn the lingo, dress sharply, and probably know more than the average Joe, but they don’t call the shots. That happens at Big Bank HQ. Somewhere in the belly of the beast, there is a gaggle of highly paid, largely worthless economists and market technicians. Using some combination of tea leaves, voodoo, crystal balls, and tarot cards, these guys come up with the selection of one-size-fits-most, happy-meal portfolios that clients will be invested in.”
How Are Portfolio’s Assembled?
“Actually, scratch that. Portfolios aren’t assembled using all kinds of mystical methods; they are assembled using cold hard cash. (It’s the finance sector. Did you think they spoke a language other than green?) See, various mutual fund companies pay marketing fees and other dubiously legal payments to the advisory firms to get them to sell their funds. In 2010, mutual fund companies paid $3.5B in perfectly legal “pay to play” schemes to get their funds featured in various investment lineups.”
A Problem Found Across Finance
“The problem isn’t just limited to Joe Six-pack Retiree. Large institutional investors, such as pension funds, and “sophisticated” rich investors get taken to the cleaners too.”
Source: New Economic Perspectives
http://neweconomicperspectives.org/2014/03/financial-sector-greatest-parasite-human-history.html
The amazing part is that large institutional investors face the same issues in getting unbiased financial advice. In the US, regulators have moved to allowing virtually any practice and defending the financial industry against consumers.