As I became better at handling money, I started to observe a recurring theme. Because the theme happened every so often, it could not be ignored any longer. And the theme is that much of the advice given by ‘financial experts’ are incorrect.

Discounting the scammers and the charlatans (which exists in every industry), people are losing money because of poor financial advice that came from people who are in the financial industries themselves: unit trust consultants, insurance agents, real estate agents, bank officers, remisiers, brokers, financial consultants, wealth advisors and even financial commentators. Now I have no doubt these folks meant no harm and gave the advice thinking it would help the investors. Sadly, the results were anything but good.

So, today I know different. I know that a significant number of the people who are dishing out financial advice are hardly equipped to do so. They are just hawking products. And even those who became successful financial advisors became so because they are good in selling, and not necessarily because of their knowledge about the product. In fact, often time, their knowledge on the subject matter is on the surface only. So, anyone following their advice runs the very real risk of losing money. But they are doing fine because they have perfected their selling skills.

1. The average financial advisor is NOT an expert

One reason why this happens is because we think the financial advisor is an expert in money matters, just like a doctor is an expert in medicine and a pilot is an expert in aviation. So we refer to him and take his advice as the gospel truth. Hardly anyone question the advice. Unfortunately for us, the average financial advisor is hardly an expert at all.

In fact, if financial advisors were measured like how other professionals are measured (based on results), they would have been sacked a long time ago!

See, unlike many other professions, it does not take much to become a financial advisor (at least in Malaysia). For example, all you need to become an insurance agent is to read a couple of manuals, sit for an exam (and of course, pass it) and attend a couple of days training, and hey, you’re qualified to sell life insurance! Of course, the agent is not going to tell the prospect that he just became an agent last Thursday. Now while he may be able to explain a little about life insurance to the prospect, it is clear that his advice on money matters will be seriously distorted. Anyone following his advice may actually be worse off.

Though I’m using the example of an insurance agent here, ditto applies to unit trust consultant, general insurance agent, property negotiator and practically anyone who is involved in an advisory capacity in finance.

By the way, let me also make it clear that the financial advisors are not con artists or out to cheat or mislead you. They are honest, hardworking and decent people. However, nine out of ten do not realize that they are not qualified to give advice on money matters. They don’t know that they don’t know a lot about money yet. See, after the two days training and learning many useful money skills, some of them get very excited and think they have discovered the secrets to money. And so they want to save the rest of us! So they start dispensing their brand of money cures to their family, friends, neighbors and acquaintances. A few will be successful (because they are good in selling) while most others will surrender before the year is up.

Of course, there are charlatans as well – Bernard Madoff and Allen Stanford are just two of the more notorious ones. By the way, the losses incurred by investors in the Madoff scam alone ran over $50 billion! Incidentally, until he was exposed as a scam artist, not a single soul lost money investing with Madoff!

2. The financial advisors are very good in selling

The second answer is that the financial advisors are very good in selling, which is different from being good in the subject matter. They have mastered the art of selling and have become master persuaders. They dress appropriately, look the part, say the right words and wonder of wonders, will even listen to us complain about our back problem and then brag about our smart children. It is little wonder that we will often part with our money even though our head tells us otherwise.

Don’t miss out the next post where I’ll be revealing why there are no neutral financial advisors.