It's the hardest question to answer in personal finance: Who can you trust (or, as my mother would insist, whom can you trust)? There's a world of self-serving advisers out there, laser-focused on getting a piece of your retirement savings.
I'd say, "Trust no one," but that's not practical when you're trying to manage money to last for life.
The better approach is to understand where your adviser's self-interest lies and ask yourself whether you can work around it. Surprisingly, the biggest hurdle you might have to overcome is your own polite tendency not to contradict what your adviser says. You might even agree to invest in something you suspect is not altogether good. Yet, as studies consistently show, many advisers often will give poor advice in order to earn more for themselves.
For a great example of both of these propositions, take a look at a recent experiment done by Sunita Sah, assistant professor of business ethics at Georgetown University in Washington, D.C.
She set up two lottery choices, one with much better prizes than the other, and divided groups of volunteers into "advisers" and "advisees" (think of the advisees as "clients"). Some advisers were promised a reward if they recommended the poorer choice and the clients followed their advice. Over three-quarters of these advisers did exactly that.
What especially fascinated me about Sah's study is that half of the clients decided to follow the poor advice, despite the fact that it was obviously bad. When the adviser's conflict of interest was specifically disclosed to them in advance, the clients were even more inclined to go along. More than 80 percent of them chose the poorer option, while also reporting that they thought the other choice was more attractive.
Why does this happen? Sah calls it the panhandler effect. Some combination of social pressure, desire to cooperate and awareness that the adviser is asking for a favor (the "panhandle") can lead us to make a decision that's against our own financial interests. Clear disclosure of the conflict of interest — supposedly a boon to consumers — actually works against us, emotionally. We don't want advisers to think we're mistrustful, so we agree, sometimes reluctantly, to what they want.
The lesson from Sah is that you're vulnerable in ways that you hadn't known. Your best defense is to stay away from the kinds of advisers most likely to lead you wrong.
First on my list of risky choices would be people presenting themselves as some sort of "senior specialist." There are more than 50 different "senior" designations — impressive initials strung after the adviser's name. They purport to show that the adviser is "chartered," or "certified," or "accredited" for seniors due to some special course of study. Mostly, the designations are merely marketing tools that the advisers paid for, with little or no serious study. For actual expertise, look for a CFP (certified financial planner) or RIA (registered investment adviser). For more on senior designations, check the report by the Consumer Financial Protection Board.
Next, stay away from free lunches for seniors, even if you think you're strong enough to go only for the food. These lunches are purely sales pitches for expensive products, not genuine advice. You can't even count on getting truthful information.
Third comes the difficult question of financial salespeople at banks, brokerages and financial planning firms who earn commissions. They're the most common source of advice for people with average earnings and savings. You know that you're paying for the financial products you buy, which is fine if the advice is good. But is it really, or are you always buying the costliest products in the shop?
To protect themselves, consumers are typically told to ask what the salesperson earns on the product or its total cost. But as Sah's study shows, disclosure could make you even more vulnerable to a pitch for high-commission investments such as variable annuities and the firm's own, branded mutual funds. So instead, test your adviser by the products he or she suggests. You want good diversification, lower-cost index mutual funds that follow the market as a whole and a philosophy of buy-and-hold, not buy-and-switch.
The simplest form of protection is to work with advisers who charge only fees, not sales commissions. To find someone local, try the Financial Planning Association (check the fee-only box), Garrett Planning Network (geared toward the average saver) and the National Association of Personal Financial Advisors (generally, for the more affluent). Fee-only is no guarantee of good advice, but it's much less likely to be bad. That's a comfort in itself.
Jane Bryant Quinn is a personal finance expert and author of Making the Most of Your Money NOW. She writes regularly for the Bulletin.
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