A recent study from the Australian National Seniors Productive Ageing Center (NSPAC) surveyed 2,200 Australians ages 40-74. Forty Six percent expressed at least "mild anxiety" about talking to a financial advisor. Another 25% expressed “moderate to severe" anxiety. Only 18% were currently using professional financial advice. Australian studies like this are useful to Americans as the financial systems of the two countries are very similar. My more than 30 years of experience as a financial advisor tells me that the numbers would be roughly the same if the study was conducted in the U.S. The Australian study revealed a direct relationship between financial anxiety and likelihood to consult a financial advisor. The authors felt that the anxiety resulted from having to disclose personal details about finances to a stranger. As you will see below, I believe there is much more to the problem than that.
We should be concerned about this issue as anxiety leads inevitably to avoidance of the cause of the anxiety. Studies indicate that those investors who use a trusted financial advisor feel better about their prospects for retirement and, in fact, are better prepared for retirement. The industry needs to address its image problem with the American public by changing the antiquated business models used to deliver financial services and the public needs to become more “financially literate”.
Many people have privacy concerns when consulting a financial advisor. I was raised in a very conservative household. We were taught from a very early age to never discuss finances outside of our immediate family. Fortunately, financial services firms are governed by the same confidentiality laws that your doctor is. Like your doctor regarding your physical health, I can’t help you if I don’t have an accurate picture of your financial health.
Fear of Being Sold
A key reason people are reluctant to seek the help of anyone in the financial services industry is the fear of being sold something. This is why people visit car dealers on Sunday when they're closed. They don’t have to deal with pesky sales people. It’s ironic, but Americans like to buy but hate to be sold. The financial services industry does not help itself in this regard by clinging to a commission model and a well-earned reputation for developing and pushing financial products that benefit brokerage firms, insurance companies and banks, but not customers. Fortunately, a consumer - friendly alternative now exists that can eliminate this source of anxiety; fee-only financial planners that acknowledge their fiduciary (put the clients’ interests ahead of their own) duty http://pilotcapitalmanagement.com/files/Fiduciary%20Advisors%20-%20Paladin%20Seminar.swf
Fear of Appearing Incompetent with Finances
We also frequently encounter potential clients that fear that talking to a financial planner is admitting that you can’t handle your own finances. The financial press has done a great disservice by popularizing the concept that it’s easy to manage your financial affairs. This may have been the case twenty to thirty years ago but is no longer true. The world has gotten to be a much more complicated place with a proliferation of financial products which have become increasingly complex. For example, when I began my career in 1986 there were 5,000 mutual funds. There are now over 30,000. In 1986, variable annuities (the most consumer adverse financial product ever created) did not exist. There are now thousands of these “financial time bombs” available. The last variable annuity prospectus I evaluated for a client was 450 pages long! And, yes, you really do have to read the whole thing, to understand exactly what it is you are buying.
For retirement savings in 1986, there were just IRA’s and the 401(k) was just getting started. Now there are no less than ten different retirement saving vehicles available to Americans. A major contributor to the 2008 financial crises and the resulting “Great Recession” was people using complex mortgage contracts that they did not understand and were practically assured to have disastrous consequences. It may be possible to do without professional financial advice, you can also prepare your own taxes and fix your own car but you also can cost yourself a lot of money unless you are willing to invest a great deal of time (and money) to educate yourself and master the required skills.
As I mentioned above, Americans are very skeptical about the financial services industry. The press in this country revels in pillorying the industry. Much of this reputation is well deserved. Its refusal to give up its outmoded commission model of compensation creates a sales driven culture that attracts… well, frankly, salespeople. The literally trillions of dollars involved assure that more than enough outright thieves, frauds and charlatans plague the industry. Brokerage firms, insurance companies and banks are very good at product development. Rest assured that these products will always benefit the firm, or else they would not continue in business. The industry continues to spend hundreds of millions of dollars to lobby against any legislation that is adverse to its established practices and business models. The products they push may or may not be in your best interest, but it is increasingly difficult to determine that.
When you consult with an independent Fee-Only financial advisor, they have nothing to sell you but their time and expertise. They may recommend that you purchase a financial product, and help you find the right one, but, if they are truly fee - only, they will not benefit financially from the purchase. This is the basic conflict of interest that the fee-only business model avoids.
Fear of Judgment
There is an additional parallel between a financial advisor and a physician. In both cases everyone who walks in your door has a problem and seeks a solution. For the financial advisor those client problems may be too much debt, overspending, bad investment decisions or just guidance on how to save for children’s education or retirement. Many are worried that they will be judged by an advisor. Nothing could be further from the truth. We learn from the field of behavioral finance, a subfield of psychology, that humans are not really wired to be good investors or financial managers. Good financial advisors recognize this and seek only to educate and to guide clients to good financial decisions based on sound practices.
The modern U.S. system of delivering medical care and the system of delivery of financial services have much in common. Both based on outmoded knowledge bases and both are based on fixing problems after they occur. Our healthcare system needs to gravitate to a wellness mindset where more reimbursement is geared toward preventing disease rather that treating it. Our financial services industry needs to gravitate to a “financial wellness” mindset with compensation for providers based on a fee for giving sound financial advice and serving in a fiduciary capacity (putting your client’s interest first) rather that selling a product for a commission. We, as consumers, need to take more responsibility for our financial well-being just as we do for our physical health.
In conclusion, I recommend that you be honest with yourself regarding your financial well-being. Find an independent, competent, fee-only financial advisor that you can trust. Be honest with them and follow their advice. Set goals and make action plans and enjoy a life free of financial worries.