The other evening, my wife, Rosie, and I were at the house of one of our friends. The current economy came up (of course) and the topic of investing was raised. We have played Cash Flow 101 with these friends and, of course, they know that financial education is my profession. They asked me the following question:
How can you tell which advice to follow? Who is right and who is wrong?
I've been thinking about this question a lot since then. How do you know who to listen to when it comes to financial issues? Do you listen to the talking heads on CNN, Fox or CNBC? What about the newspaper columnists? Or what about the financial advisors?
After considerable reflection, I came up with my answer to this question. THE WAY TO EVALUATE FINANCIAL ADVICE IS TO LOOK AT HOW THE PERSON GIVING THE ADVICE GETS PAID. How they are paid will tell you a lot about their incentive to provide certain types of information or advice. Let me explain by going through some examples.
Start with the financial advisors. How do they get paid? Most of them get paid from commissions for specific products they sell. Do you want advice from someone whose payday comes from selling a specific product? I don't. Their incentive is to advise you to buy their product. The same goes equally for real estate agents, insurance agents and investment advisors. They all get paid only if you invest in their “product.” So getting financial education from them can be a bit risky.
What about the talking heads or so-called experts on television and radio? They get paid for viewers. So their incentive is to say what will get them most noticed. That means fear and controversy. And who buys the advertising on their stations? Primarily the real estate agents, insurance agents and investment advisors, so of course, they will tend to promote their customers.
Is there anyone we have left out? Oh yes – the advisors who get paid simply for providing good financial education by the people they are educating. Their incentive (and yes, this includes ProVision, so of course, I am biased) is to provide the best education so you will buy more of it. Wouldn't you rather take advice from someone you are paying specifically to give you good advice rather that someone with another motive?
By the way, I include in this latter group of wrongly motivated advisors those of my CPA colleagues who provide investment advice, sell mutual funds and other products such as annuities and insurance. Shame on you! You give up your independence by doing this. I know the temptation is great. I can't tell you how many times I have been approached by stock brokerage houses and others to promote their products to my clients and get paid for it.
So look to those financial educators whose interest is solely to provide sound financial education.
Now, I'm not saying that there aren't good people to listen to who get paid through both products and education. What I am saying is that you have to be more careful when their are motivations other than simply providing good education.
So, as we say in the accounting industry, “follow the money.” When you do that, you can get a pretty good idea of whose information to trust.
Remember that your financial freedom is closer than you think.
Warmest regards,
Tom
