Nancy Graham December 20, 2018 Personal Wealth The “Best of No Dumb Questions” Series Continues: A Cautionary Tale of Best Interests As we continue with our “Best of No Dumb Questions” series, there’s one question I don’t think we can repeat too often: How can you tell whether the advice you’re receiving is in YOUR best financial interest? Unfortunately, it’s often hard for individual investors to tell the difference between best-interest advice and a hard sales pitch in disguise. I covered this important subject in a July 2017 “No Dumb Questions” video. At the time, I shared some then-breaking news exposing how big bank employees often felt pressured to prioritize their employer’s profits over their customers’ well-being. I doubt the landscape has changed a great deal since then, which makes it well worth revisiting today. Your typical Bay Street banker may generally mean well, and want to take good care of your money when they’re able. You, in turn, hope they’ll do so. But from there, your similar interests often dramatically diverge, since most bank and similar financial firm employees are subject to incentives that have nothing to do with you, including rewarding “carrots” as well as punishing “sticks.” On the carrot front, they usually receive commissions when they sell you something; bonuses for pushing one product over another; and extra-special rewards when they outperform their peers by selling you a whole lot of goods and services you may not need. And those are just the perks. They’re usually under hard pressure to meet escalating sales quotas to keep their jobs at all. In short, that best-interest financial advice you’re hoping for may rank a distant second to their own or their employer’s priorities. Think I’m exaggerating? A March 2017 CBC News “Go Public” reporter sparked an investigation into these very practices. The series broke when three TD Bank Group tellers spoke out about the “incredible pressure” they felt they were under “to squeeze profits from customers by signing them up for products and services they don’t need.” If it were just three unhappy tellers, the story might have ended there. But within days, CBC was inundated with almost 1,000 e-mails from bank employees across Canada and among all five big banks. The watch-fire quickly grew into a bonfire of complaints, fueled by the bank employees themselves. In a follow-up piece aptly entitled, “We are all doing it,” CBC reported, “employees from RBC, BMO, CIBC, TD and Scotiabank locations across Canada describe the pressures to hit targets that are monitored weekly, daily and in some cases hourly.” To its credit, the Financial Consumer Agency of Canada did launch an investigation and published a March 2018 report in the wake of the coverage. Among other concerns, the FCAC found that retail banks are “predominantly focused on selling products and services, increasing the risk that consumers’ interests are not always given the appropriate priority.” That said, many of us feel the FCAC has not yet gone nearly far enough in taking any meaningful preventive action, as suggested in this CBC follow-up coverage. So what’s an investor to do? Let’s circle back to our original “No Dumb Question.” How do you know if you’re getting good advice? Of course you want to work with a professional who has enough experience and credentials to know what she’s talking about. But here’s another key question to ask when interviewing an advisor: How are you getting paid? The answer should sound something like this: “You’ll hire me directly, paying me a fully disclosed fee. To earn my fee, I’ll provide you with personalized, independent advice in a relationship that is always driven by your highest interest. If I ever receive any other forms of compensation, I will fully disclose these to you as well.” What if you instead hear something more like this: “Not to worry! My employer pays me to service your account. I’m happy to answer your questions and offer you my complimentary advice.” In light of what you now know about the pressures that commission-based financial company employees face, I hope it’s obvious that the second answer should raise some bright red flags about whose interests that “free” advice is likely to be serving. We’ve got one remaining post in our “Best of No Dumb Questions” series. Want to know what it’s about? Keep in touch and we’ll let you know soon! Share: Facebook Twitter LinkedIn Email CIRO Advisor Report