Before I Throw ShadeBefore I start to lay the blame on the financial industry, I want to say one thing loud and clear. I am not anti-financial advisor or anti-insurance agent. In fact, I support the highest ethical standard of financial advising and insurance sales. I am simply against bad models that don’t help my readers. This is the reason that I publish a list of recommended insurance agents who sell term-life and disability insurance the right way. Many agents get denied before ever making the list in the first place. Similarly, I carry a list of recommend financial advisors who meet the gold-standard of financial advising. These advisors run their financial planning business the right way. They limit their conflicts of interest, and provide high quality advice at a fair price. Don’t misunderstand what I am saying. If you help increase financial literacy and provide non-conflicted financial advice, I’ve got nothing but kind things to say. However, if you are misusing or abusing good doctors who don’t know better, I’m not going to limit my scorn. On a very personal level, I understand how negatively bad advice can impact a family’s financial security. With that disclaimer out of the way, here are five reasons you shouldn’t trust the financial industry.
1. Follow the MoneyI tell people all of the time that their financial decisions are a direct reflection of their values. If you say that you value giving to others, and yet only 1% of your gross income goes towards charitable giving, I’d say that you are deceiving yourself. Similarly, if someone told me that paying for their kids’ college education was important, but their oldest was 10 years old and they don’t have any money saved for them (say, in a 529 plan), it clearly is less important than wherever the money is actually going. The same could be said of any business or industry. Follow the money to find what is valued. Let’s take a look at the financial industry’s financial decisions. In 2013, the Consumer Financial Protection Bureau (CFPB) performed a study looking into the spending habits of financial companies. The evidence here is a bit damning. In total, the financial services industry spends $25 on marketing products for every $1 that is spent on consumer education. Only $670 million was spent on financial education while the financial industry spent $17 billion on marketing. If this were a personal budget instead of an industry budget, what does this show? Ultimately, it proves that – despite American citizens having a relatively abysmal financial literacy (14th in the world) despite their affluence (#1 economy) – the financial industry cares much more about selling products than they do about fixing American financial literacy. And it is not a whole lot better at the individual advisory level either. About 40% of advisors take part in improving financial literacy. The majority put their time and efforts somewhere else.
2. The Worse the Product, The Higher the CommissionLike many industries, the financial industry is riddled with conflicts of interest. One of the biggest conflicts involves the sale of insurance and investment products. Despite the pervasive knowledge out there that index funds perform better than actively managed funds, I still hear stories from doctors who were duped into putting their money into actively managed funds. Why? At first, they will tell me that their advisor “really believes” in the funds they choose. Then, the truth comes out. The fund is often loaded. There is a commission to be made. And, many advisors are not required to do what is best for their clients (more below on this one). Similarly, in the realm of insurance, an agent makes much more money from whole life insurance than term life insurance. Why? Because the premiums are higher. How high? The typical insurance commission for a whole life policy ranges between 50% to 110% of the first year’s premium. That can continue into the second year, and it declines thereafter. For example, if a doctor is fooled into purchasing a whole life insurance with a $20,000 annual premium, they can anticipate $10,000 to $22,000 going directly into the insurance agent’s pocket in the first year. It shouldn’t be surprising, then, that whole life insurance provides a negative return for the first 10 to 15 years. If the financial industry was built to benefit the customer, better products would have better commissions. Unfortunately, that’s not the case. Many products are meant to be sold. Not purchased.
Further Reading: Want to avoid bad advice? Buy insurance products from these insurance agents.
3. Being a Fiduciary Isn’t RequiredImagine a world where doctors don’t take an oath to do what is best for their patients. What if you practiced in a world where it was acceptable to fill the coffers instead of doing what is best? If you can imagine that world, then you can imagine exactly what the financial industry world looks like, too. Yet, there is something in the financial industry that could help stop this. It’s called a fiduciary standard. A fiduciary standard is an obligation to do what is legally and ethically best for the client. Unfortunately, this standard is not universally required of all investment advisors, insurance agents, brokers, and financial planners that work in the industry. In fact, when a fiduciary rule was proposed in congress, insurance companies and brokerages were adamantly opposed. Do you need disability insurance as a physician? Yes. Should you buy it from just anyone? Not in your life. And, speaking of life, you shouldn’t buy life insurance from the first person you find. This is why I recommend people get quotes from three different recommended agents. Once you hear information from multiple sources, you can make an informed decision. Don’t trust the financial industry blindly.
4. The Financial Industry Created this MonsterI try not to practice anecdotal medicine. However, I would be lying if I said that personal experiences do not impact my decisions. The three points above make a good case. Yet, just like in medicine, the anecdotes are often just as powerful. The number of examples for bad financial advice and inappropriate sales tactics are seemingly limitless. I’ve listened to countless doctors tell me they were duped by an insurance agent masquerading as a financial advisor. It’s frightening; as are the number of stories of people who later found out their financial advisor was charging a 1.5-2% AUM, providing bad financial advice, or not acting in their best interest. You don’t have to look too far into the experiences of many bloggers before you stumble upon the part of their origin story that involved getting hoodwinked by the financial industry. The financial industry created many of these personal finance blogging monsters. For some, it was being sold an inappropriate whole life insurance product (click here for countless examples of bad whole life insurance policies being sold to docs). Others found their advisor placing them into loaded or actively managed funds that were being outperformed by index funds. What happened to me? Well, an insurance agent convinced me to apply for disability insurance despite having an essential tremor when I should have secured the guaranteed standard issue disability policy first. To this day, I cannot get personal disability coverage.
Further Reading: Check out the top ten things a doctor should know about disability insurance.
5. Corporate Finance Has Problems, Too!If it weren’t bad enough that individual advisors and insurance agents have problems, the corporate environment isn’t much better! On one hand, Wells Fargo opened fraudulent accounts. On the other hand, Bank of America was sanctioned by the SEC for using customer cash flow to illegally increase profits. The examples of fraud in the financial industry are too numerous to count. If you don’t believe me, maybe you’ll believe all of the people the IRS listed as conducting fraudulent activities. You don’t have to look too far or too hard to find these examples. Yet, many trust the financial industry to do what is best for them at both a personal and corporate level.
Take Home: Why You Shouldn’t Trust the Financial IndustryUltimately, no one cares more about your situation than you. Your advisor or insurance agent can be a “nice person”, a family friend, or someone your family has used for a long time. Still, you should not blindly trust them. This is why improving your financial literacy is important. Whether you plan to become a Do-It-Yourself Investor or you plan on using professional financial advice, knowledge is power. Don’t leave yourself exposed to the corrupt nature that is the financial industry. Start now. Protect yourself. Read a good personal finance book to get started. And then continue to maintain your financial education through good sources. Buy term-life and disability insurance products from recommended agents for doctors. When you need financial advice, get it from a recommended financial advisor.
Have you been misused or abused by the financial industry? Have you experienced the difference between good and bad financial advice? Tell your story below.