Last week the BC Securities Commission issued a warning to investors alongside its Smarter Investor Study. The crux of the message: trusting your financial advisor might prevent you from seeing trouble spots with your investments. The study found that while most people acknowledged that ultimately it is their responsibility to research and monitor investments recommended by their investment advisor, a much smaller percentage actually do anything about it. And the report attributes this gap to one thing – everybody trusts their advisor.
While a trusting relationship with your financial advisor is of course good thing, Pamela MacDonald, Director of Communications and Education at the BC Securities Commission warns that, “Trust in an advisor is not enough to ensure future financial health. To make the most of their investments, investors need to actively involve themselves in their relationship with their advisor and the decisions they make.”
We couldn’t agree more. Trust is a belief, and that belief should be verified from time to time. Author Seth Godin described it this way in a recent piece: “The obvious and rational equation is that being trustworthy plus being transparent will lead you to be trusted. Verification of trustworthiness should lead to trust.” However he also points out some realistic impediments to this ideal. “We may very well be moving toward a world where data is the dominant way we choose to make decisions about trust. In the meantime, the symbols and signals that mesh with our irrational worldviews continue to drive our thinking.”
Emotions and psychology have a role to play. People like to go with their gut and where informational and educational asymmetries exist there will always be those knowingly (evil) or unknowingly (ignorant) willing to take advantage of investors relying solely on those “unverified signals and symbols” or emotions to decide who to trust.
Fortunately the cost of verification is not high. In fact it’s pretty straight forward. The securities commission has helpful recommendations for investors seeking to verify the trust they have in their advisor:
- “Ask your advisor about fees and how he or she is compensated. Fees are a fact of investing, but they do have an impact on investment returns”.
- “Check your advisor’s registration to ensure he or she is licensed to sell you a recommended investment”.
- “Research investments recommended by your advisor so that you fully understand what you are putting your money into”.
- “Understand the degree of risk you are willing to take and how much you can afford to lose.”
And if all that sounds a little too confrontational, remember you can always ask for a second opinion. Never underestimate the value (benefit – cost) of a second opinion. Over the last few months I have had an illuminating experience with the dental industry, another realm with trust issues. To make a long story short, just as I was about to embark on a “full mouth reconstruction” journey which would have involved me looking like a young teenager with a mouth full of railroad tracks for three years and spending close to $100k, my gut (and my wallet) led me to seek a second opinion. The result – a few simple fixes and I’m probably good to go for years. Was the second opinion telling me what I wanted to hear? Of course. Was the person giving the second opinion extremely well qualified? Of course.
It’s a very relevant analogy. In the end, verification, either through your own research or a second opinion, is an extremely important step in establishing trust and getting what is best for you, whether it’s with your dentist or your financial advisor. But your gut instinct is also really important and you can’t ignore it. After all you know yourself and your situation better than anyone. Marry the two (verification and your gut instinct) and I promise you will find the answer that will bring a confident smile to your face!