When I get more experience in this industry, I beginning to notice that clients often make judgment call based on packaging or external perception rather then logic and common sense. Here are some examples:

There was one time which I honestly (without putting too much thought into my action) lay out the detailed charges breakdown of an investment product to a client. Immediately he felt that the product is expensive. However, by my calculation it is cheap based on logic and portfolio size. Nevertheless the client make a judgment call that the product is expensive based on the LENGTH of the page describing the charges. Although I explained why it is not expensive based on logic and simple maths, his mind was already made up.

After learning my lesson, I decided to consolidate all charges into one estimated ballpark annual fee to another client using exactly the same product. This client felt that the product cost is reasonable. My gut feel is because he seemingly thinks that there is only one charge – nevermind the magnitude of the fee. Again I think he based his judgment on the LENGTH of the description of the fee which is merely a 12 point font size tall. I know he has no idea whether the fee reasonable or not because he did not have much experience with this kind of product and hence does not know the market rate for the fee involved.

In these two real life cases, clients make judgment call based on perception or packaging rather then logic.

Other advisers in the industry who is more experience in this field has exploited clients weakness to their advantage. For example, some advisers like to compare fee-based and commission-based remuneration scheme. The fee-based camp gives the impression that it is good for the client and the commission-based advisers have conflict of interest. I would say it is at times just perception. To illustrate this point, some fee-based adviser say that they don’t earn a commission and hence will not charge an upfront fee to the client. Instead, they will charge a “wrap fee” (i.e. a periodic charge to the client based on portfolio size) as the advisory fee for managing the portfolio. This seems to give an impression that commission = upfront fee and advisory fee = wrap fee. But then, why can’t the upfront fee be considered as the remuneration for giving advice? Also, why can’t the wrap fee be considered a commission? Does it mean that there is no conflict of interest for charging only wrap fee? I can see there is a conflict of interest for example – a wrap-fee-only (unethical) adviser could cleverly advise his client to buy-term and invest the rest. “The rest” refers to investing with the adviser. The adviser will earn a perpetual fee through wrap fee. On the other hand if he did not to recommend such strategy, then he has no wrap fee and could only earn through the commission for whole life policy which only pays 3 or 6 years of commission. Surely any businessman want to have perpetual income rather then just for short-term? (oopps, I forgot to say that “fee-only-based” adviser will refund all commission for a life policy. So he actually earns NOTHING for selling a whole life policy. So it is always better to recommend a term insurance which the commission is small and hence the required refund is minimum)

Don’t get me wrong, I am not say buy-term-invest-the-rest is wrong, but if the recommendation is based on wanting the wrap fee, then it is indeed unethical and I would say illegal under the Financial Advisers Act for not giving reasonable advice.  

Some advisers openly declare that in the media that Buy-Term-Invest-the-Rest is the ONLY strategy a person should use. But as what I understand, without performing any needs analysis of the client, how can any recommendation be done? Therefore, these advisers have already committed a crime under the Financial Advisers Act for giving recommendation without basis. I really wonder those Professional Indemnity underwriters are fully aware that they are taking in a huge liability for insuring these advisers against professional liability.

To me I strongly felt that recommendations WITHOUT performing any needs-analysis is due to the conflict of interest a described above.

But then all these are due to client’s perception of how a product or service is packaged. A nice packaging doesn’t mean that the content is good; conversely an ugly packaging does not mean that the content is lousy. As the saying goes, do not judge a book by its cover.

To illustrate a good package with lousy content is a misrepresentation which some advisers do with products that have a backend fee. These products normally have no upfront fee. 100% of the money is invested from day one. However, the adviser will still get a commission from the product provider. Personally I don’t see anything wrong with this but the problem is that some of these advisers lie to their clients that the product does not pay any commission. Does this impact the client? Of course because the product provider will claw back the commission from the client via higher management fee. The client is still paying commission to the adviser strictly speaking. Why does the adviser want to lie to the client as if there is something to hide? The reason is perception. If the client thinks there is no commission involved (or no upfront fee), then the product is perceived “cheap” and the adviser can close the case faster. But I would say that the content inside can be lousy because of higher management fee.

I know of people who are really good in giving advice, who are smart, knowledgeable and ethical. They desire so much to put their competence to good use. Unfortunately their sales are bad because clients judge them by their “packaging”.  A competent person does not necessarily know how to present hard facts into something attractive for the client.  Very unfortunate, client always judge based on the cover of the book. A typical textbook sales model will look like this:

Prospecting -> Presentation -> Closing

Prospecting is a process in which the sales person use various methods to get an appointments with his prospects. Once he have an appointment, they go into the discussion and perhaps he will do his “Presentation”. If the Presentation is good, there will be the Close in which the client buys something from him.

I am always troubled by the above process if it is apply to the financial advisory services. The reason is because financial adviser isn’t a sales person He is a professional with duty of care to help his clients. I am very sure everybody agrees that lawyers, doctors, accountants and engineers are professionals and never considered a sales job. Yet, it is very unfortunate that a financial adviser is considered a “sales job”. One reason could be because many advisers think that way and hence act that way. But I would say that it is also due to the way client thinks of their adviser.

If a Client judges a book by its cover, then the adviser has to put on an “act” just to show a nice cover, Does it mean that the adviser has to remember the sales model above in which the “Presentation” is like a show?

I have no answer to these. I only have one advice to people who has engaged or is engaging their advisers: never judge a book by its cover. Use logic reasoning and look at the contents inside. Judging a book by its cover will eliminate competent advisers who have no acting skill and this will leave the industry with just actors. Ultimately it is the client who will suffer.

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