Who Can I Trust in the Financial Services Industry?

For well over a decade, my unrelenting focus has been understanding financial risk and developing practical strategies for managing the risk created by job loss, illness or disability, bear markets and funding thirty years of retirement. Since 1997, I have watched the job of managing those risks become increasingly complex.

One reason understanding and managing financial risk is more difficult is the world, in general, changes at such an incredible pace. Fellow speaker, Vince Poscente, calls it the more-faster-now culture. The other more sinister reason the job is more difficult is it seems so difficult to know who to trust. Over the last ten years or so, in the financial services industry in particular, so many have proven themselves so untrustworthy.

I am not just talking about the Enrons and Bernie Madoffs of the world. I am talking about the countless number of brokerage firms, insurance companies, mutual fund complexes, brokers and investment managers who continue to sell you products – like mutual funds or annuities – and lies – like market timing or stock picking – when all the evidence clearly says those products are only good for the people selling them. So let me give you some guidelines to help you sort out the snakes from the good guys.


The first criteria is transparency. Transparency means everything is up front and out in the open. It is the financial services equivalent of an open kitchen in a restaurant. Ask yourself these questions:

– Do you know exactly how the advisor is getting paid, how much and by whom?

– Can you see where the conflict of interests might be so you can evaluate whether they are coloring the advice you are receiving?

Requiring transparency will eliminate the vast majority of advisors working for banks, insurance companies, brokerage firms and almost anyone selling commissioned financial products. Why is transparency important? It is quite simple. If someone else is paying the bill, their interests will likely come before yours.


The second thing on your checklist is do they promise the impossible? Ask yourself these questions:

– Do they promise unrealistic returns?

– Do they claim they can predict which way the market will go or pick the stocks that will do better than average?

– Do they tell you that an investment is no risk, or change the subject when you ask about risk?

All of these should set off alarm bells in your head. The first is most pervasive among unregulated entities promoting active trading strategies. The second will disqualify a lot of advisors – including an advisor that promotes an actively managed mutual fund. The third seems to be most common in the variable annuity and life settlement markets but it also occurs elsewhere. In February, 2008, the Auction Rate Securities market failed. $200 billion worth of ARSs that had been sold as a cash equivalent became illiquid.

Remember, there is no such thing as a risk-free investment. Risk takes many forms. Just because something doesn’t have market risk or credit risk does not mean it doesn’t have other forms of risk.


The third criteria is expertise. And you have to be careful here. We often infer expertise from things that are meaningless. Being a celebrity doesn’t make you an expert. Having a newspaper column, TV show, radio show or having written a book doesn’t make you an expert. Having hundreds of millions or even billions of dollars of assets under management doesn’t make you an expert. Ask yourself these questions:

– Is the advisor recommending the same thing a hundred other advisors would or could?

– Is there any original thinking going into how to solve your specific financial challenges?

– Can the advisor back up their recommendations, with empirical data, from unbiased researchers, supporting their recommendations?

My favorite definition of expertise comes from Mark Sanborn. Expertise is the ability to synthesize existing ideas and think creatively – to add new knowledge and contribute new ideas to your domain of expertise. If your advisor spends most of his time reading about sales skills or practice management rather than the latest academic research, that should be a red flag.

Behavioral Finance

And finally, knowing, as we do, that investors rarely act in a completely rational manner as traditional economic theory would suggest, and knowing that when it comes to investing, our emotions are our worst enemy, if your advisor doesn’t have some sort of emphasis on the behavioral component of investing, I would be concerned. Ask yourself these questions:

– Does the advisor address the behavioral component of investing in their presentation or materials?

– What safeguards or mechanisms are in place to keep me from sabotaging my portfolio in a fit of fear or greed?

– What safeguards or mechanisms are in place to keep the advisor from sabotaging my portfolio in a fit of fear or greed?

The Quantitative Analysis of Investor Behavior, done each year by Dalbar, tells us that over the twenty year period ending in 2005, the stock market averaged roughly 12%. Over that same period, the average stock mutual fund averaged roughly 9%. The average stock mutual fund investor? Only 4%!

The difference between 4% and 9% is the result of buying and selling at the exact wrong time and what causes that is fear and greed. That’s the low hanging fruit! If an advisor doesn’t emphasize the behavioral aspects of investing, they are pretty limited in what they can do for you. Those are my four, although there could certainly be more. I am curious what you think – about these and about what you would add to the list.

Why The Financial Service Industry’s ‘Arbitration Boom’ Is Here To Stay

Arbitration has been gaining ground as the preferred method of dispute resolution in the financial services sector for years now and there is very little reason to think this trend will change. With the ongoing turmoil with government-funded programs such as Social Security, the continuing abandonment of old-style pensions and the resulting sharper focus on retirement and wealth-building, the financial services industry is itself experiencing a boom. The higher volume of clients and the larger volume of monies being managed inevitably brings a higher number of complaints and conflicts. The Financial Service Industry has found arbitration to be a superior choice to litigation for the same reasons as small business and individuals, and as a result arbitration is set to become even more common in the future.

The Benefits of Arbitration

The Financial Service Industry has found arbitration to be a better choice for three basic reasons:

Arbitration is Faster.

A recent international study has found that the average length of a civil trial is two and half years, while the average length of cases decided via arbitration is just 8.6 months. While there will always be exceptions to the rule, in general arbitration will always be a faster and more efficient solution.

Arbitration is More Affordable.

In part due to the speed of the process and in part due to the streamlined nature of the process – excluding much of the legal sparring that is involved in a lawsuit) – arbitration has less costs associated with the process than litigation. No matter what the actual costs of the arbitration process (the arbitrator’s fee, lawyers’ fees, room rental, etc.) the speed of resolution always results in real savings.

Arbitration is Friendlier.

The key word in ‘Financial Service’ is service. The industry has customers and clients, and as such has a stake in maintaining an amicable environment. Arbitration gives a sense of control to both parties and focuses on mutually satisfactory solutions to conflicts.

These three reasons point to a growing use of arbitration in the financial service industry. A final consideration is the cluttered state of court calendars; the delays between filing a lawsuit and actually getting a court date continue to widen, and even when a proceeding is begun continuances can sometimes interrupt court dates for weeks or months. This can only exacerbate what is already a painfully slow process and drive even reluctant parties to consider the speed and efficiency of the arbitration process.

Winning in the Financial Services Industry is a Lot Like Making the Money in the First Place

In turbulent economic times, working in the financial services industry can be quite challenging. Even when recovery is on the way investors are sketchy, fearful and almost hostile towards anyone in the industry. Although it’s not easy to win during such a global economic crisis as a financial services professional, it is possible, let me explain:

You know money is a lot like winning. If you don’t care about it, you’ll never have any. Any money. Or any wins. If you are a financial services consultant or sell financial products you might wish to make a note of it. If the financial company you work is having difficulties in this market, it can become a catch-22 if you do not do it right.

For instance, you need to make money to live well, but if you sell people financial products that are not appropriate you’ll lose your way for violating your integrity. Thus, you have to think of it this way; You must make money, by making other people money, or make money by saving people money.

Therefore you are doing a valuable service for them, and thus, YOU deserve the money you make. And if you are successful in your services to help them make money, you will get referrals and have no trouble asking for referrals, because? Well, because you have earned them and YOU deserve the money you’ve made.

Many financial firms have quotas, and since that type of sales is a numbers game you have to obviously focus on the number of folks you get in front of and talk to. I suppose they already told you that you need to see X amount of people a day, week, month, to meet your goals.

All goals should be broken into sub-goals and you must treat the sub-goals as important as the main-bigger goal. Always remembering “service first” in other words YOU resolve to help people make money or keep more of the money they make.

Maybe to help you in this dilemma, set your goals to how much money you saved or helped grow for other people and set that goal in the millions of dollars per week or month? Whatever number that should correspond to your firms goals.

If you find you cannot make people money, say due to the economic situation, consider how much you saved them from losing now, and as the economic factors shift how much money you grew their portfolio, investment (s), etc. If you find a better way to make them more money on their money or grow their nest egg with a different firm, then quit and work for the better company.

This will give you a strong personal conviction in what you are doing. You must have PURPOSE to win, (participation without purpose is not noble, it’s just busy work) a reason and one which matches your personal character.

If you had a low personal character or integrity value, then you’d need to go take care of that prior to focusing on making money, otherwise you will set yourself adrift towards a dead end. Think of it like Niagara Falls, it’s important to know it’s there, just don’t go over it.