Are You Receiving Biased Financial Advice?
In my many years as an analyst I've seen a lot of problems with conflicts of interest and bias. There are several significant problems when trying to find truly "independent" and "unbiased" financial advice. In this article I list seven specific sources of conflict of interest and bias that could effect the financial advice you receive.
1) Regulatory issues: I won't get into the specific regulations here, but the in general the more they try to regulate out conflicts of interest the more bias is introduced into the system by the regulators (unintentionally I assume).
2) Obviously, anyone who works for an insurance or financial institution will have profit, industry and regulatory reasons to skew the results of an analysis. Often advisors can't contractually or legally encourage a client to invest somewhere else, even if it is clearly in the clients best interest (even a "fiduciary" is required by regulation to put the interests of the company where they are licensed, before their client's interest).
3) Most places claiming to be "independent" just mean that they are not employed directly by an insurance or investment company. They are likely still licensed with a financial or insurance company, so they can still sell products receive commissions encouraging them to steer you towards items they sell (for example if they are licensed as an insurance agent they are likely to recommend an insurance product over something like real estate where they wont receive the commission.
4) Many places invest your money for you. Any time this is the case their pay is linked to how much you give them to invest; because of this they seem to find it in your best interest to give them your money.
5) Even if you don't give them your money directly, they may make money indirectly from industry through commissions, referral fees, or by manipulating you into buying from a company where they have a financial tie. Often this can be discovered by asking if they have a real estate, or securities license. Unfortunately this can be difficult if it's an unregulated industry like gold or if the person with the direct financial interest is a relative and not themselves.
6) Sometimes the person has a secondary interest in the outcome that creates bias. This can be seen in the example of an accountant who provides investment analysis (I have come across this multiple times). If you are a solid client that pays well they might provide the advice that is easiest both on the analysis side and for when they need to complete your taxes. If you are not a client or they want to get more money from you they can skew the analysis towards the complex (defined benefits plans and limited partnerships) ensuring you need their services and that they can charge more money.
7) Lastly, the bias of familiarity and comfort. This is where someone skews the result (consciously or unconsciously) to what they are more familiar with or regularly use. This bias is common and must be overcome even when conducting the analysis for yourself. You can and must identify and mitigate this bias to conduct a proper analysis.
Preventing bias: The first step to fix this is the analyst must be aware of their own bias. They must then put aside any preconceived notion and focus on the facts. This can be hard, especially if you have run similar analysis in the past; you want to jump to the conclusion (this investment is always better than that...). The fist answer may be correct 95% of the time, but when you are in the 5% you don't want your analyst ignoring a material factor that makes your case different.
Identifying bias: To find out if someone is biased ask them if there are any investments they prefer (most people will name one or more items). Then ask how their bias for those investments affects their analysis. What they answer is less important than how they answer. An unbiased analyst is logical and somewhat disinterested, as should be their answer. A logical and unbiased person will never be offended by this type of logical question (if you’ve asked this question the last three times you did business with them they may become annoyed). If they dodge the question, become emotional, or try to appeal to your emotions, then they are simply a salesman, have a vested interest in the outcome, or not cut out to do the analysis.
Note: This technique even works on yourself! Ask yourself, “are there any investments or investment strategies you prefer?” (Actually list them.) Now ask yourself, “how will I overcome my bias for these investments?” If your initial instinct is to deny or the need to justify, your bias is very strong. If you can’t come up with a logical answer, you may need additional help.
My bias: I admit that I’m biased towards logical, disinterested analysis and against conflict of interests; and that the article is self-serving, but all article are written for some self-serving reason or they wouldn’t be written.
What have I decided to do different? I make sure that we don't have any conflicts of interest, and do everything possible to eliminate or minimize any bias. We don't invest your money or receive money from industry. We don't work with any particular industry. We don't tell you how to invest your money. It doesn't matter whether you want to invest in real estate, stocks, bonds, or collector bubble gum we provide education so you can make your own financial decisions and for the more complex issues we can do the analysis so you can make an informed decision.