From time to time we all take advice. We seek advice from a Doctor when we don’ 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 irradiated, 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 ones battles to win the war. Finding someone whose interests are aligned with yours is therefore necessary. So, how do we manage the incentive conundrum? One of the simplest ways to address this issue, is for the ‘adviser’ to disclose what their incentives are. The primary incentive is commission and provided an investor has been given the information in a clear and concise format, they can determine whether what’s being offered is value for money.
And this is where things get interesting. Comparing like for like is difficult. At Abacus we disclose and earn commissions for some of the work we do, but we also do a lot of work in return. The equivalent commission could be paid to an adviser who is simply suggesting a product, having followed the most basic of processes. 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.
Cultivating 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 them over the long term. Our clients certainly seem to appreciate it.
By Con Lillis – CEO, MBA