In the past I have talked about incentives. Research demonstrates over and over that incentives are powerful influences in decision making. One great example of this is the use of taxation on deterring certain behaviours over the long term: cigarette and carbon taxes for example.
In Canada we largely live in a buyer-beware consumer culture. While certain protections exist for blatant fraud and gross negligence in duties, for the most part the average consumer can really be jerked around before someone gets smacked for it.
Things like negligence, minor fraud, or just unethical behaviour can be very difficult to prove as an criminal or fair trading protection offense. It gets especially difficult when nearly every "professional" in the field is doing it.
For this reason, it is important to understand the implications of each decision you make, or you are encouraged to make.
Ripe for Abuse
The personal finance industry is one profession that is particularly ripe for abuse. After all, it is all about money.
Most potential clients know little about finance to begin with—financial literacy is extremely low. Canadians don't understand stock markets and most perceive stocks to be inherently risky. There are heaps of terminology and jargon that can rival any legal document. Cloudy compensation structures are the norm. For these reasons, there is a massive reliance on trust in the "professionals"—guys and gals who hold three-letter designations and are employed by some bank, insurance company, or investment group.
Getting certified to provide financial advice and other services isn't overly difficult. All you need to do is find a job at a registered firm, take a few quick courses online while you're working, and buy a few nice suits. Nothing too crazy. You actually don't even need to have graduated from high school.
Investment firms are money making machines. Assets under management is everything, so sales abilities rather than financial knowledge and strong ethics are driving factors for employment. In other words, you can be a broke-ass, failed at school, living in mom's basement, financially illiterate bum, but if you can sell and put on a good facade, well... you're hired.
Choosing a Good Adviser
I personally am a strong believer in being your own adviser. Provided you are willing to put in the work and keep your emotions under control, the incentives are lined up the way they should be—no one cares more about your money than you.
That said, I also realize that my personal knowledge of the investment and finance world is better than average. This makes me much more comfortable with self-directed investing compared to many others.
I have mostly learned by reading and making mistakes. I've consumed tonnes and tonnes of books, blogs, financial reports, financial media, and other documents. While I learned how to read accounting documents and financial statements at university, my formal education did little for me when it comes to investing. The best education is losing money and doing a thorough analysis of what went wrong.
I'd be the first to admit that I've made some mistakes, but overall self-directed investing has been a huge success for me. Despite the mistakes I've made, I am absolutely convinced I would be worse off now had I worked with a "professional" from day one.
Reasons why? Compensation, complacency, corruption, and complication.
In the personal finance landscape, the odds are stacked against me. I would probably have chosen a salesperson, not a good money manager.
It's important to be able to separate good advisers from bad ones, even if you have limited knowledge of finances and investing yourself.
Here are four factors to help you find a good adviser, not just a greedy salesperson.
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