From time to time we all take advice. We seek advice from a Doctor when we don’t feel well, talk to a lawyer if we have legal concerns and we ask friends, family and colleagues about all sorts of things. We assume that the people we ask, have our best interests at heart. And while this is frequently the case, there are times when we unwittingly seek counsel from an individual or organisation that is not incentivised to help us.
Incentives frequently determine the outcome of a situation between two or more parties. If we are driven to act in a specific way, either as a result of a career, financial or social reward, we are increasingly likely to act that way. Alignment of incentives is therefore particularly important when taking advice.
In financial services, miss-aligned incentives are often hidden behind excessive complexity. Yes, personal finance is intrinsically complicated and inexperienced individuals are naturally looking to find someone that can balance up the information asymmetry for them. This problem could largely be irradicated, if investors knew as much as the person advising them and could make an informed judgement to delegate responsibility for these decisions.
We can’t all be experts in every subject and in the fast-paced world we inhabit, one needs to pick one’s battles to win the war. Finding someone whose interests are aligned with yours is therefore necessary. So, how do we manage the incentive conundrum? A starting point is for the ‘adviser’ to disclose what their incentives are. But if you, the client, do not possess sufficient information to make a judgement as to whether the adviser’s incentive is detrimental to your position, how does disclosure help.
This was one of the conclusions of the Retail Distribution Review in the UK. The Financial Conduct Authority went on to effectively ban commissions relating to investment products and introduced customer agreed remuneration. This turned retail investment advice into a fee-based business in the UK. At Abacus, we adopted this approach some years ago. We are fee-based and firmly on the side of the client. We work with our clients to create a financial plan that gives context to the investment portfolios we establish for them, and we continue to work with them over the long term.
Investing in long term relationships is also a very transparent way of remaining accountable for the advice we give. It is perhaps the most effective way of managing incentives, being accountable for outcomes in the long run. Our clients certainly seem to appreciate it.
By Con Lillis – CEO, MBA