Ego and Investing

 In Advisers, Asset Allocation, Expectations, Fees, Financial Planning, Forecasts, Investments, Retirees, Retirement

I while back I had an Aha! moment in my career – thanks to my brother.  After about 18 years in the business, it has become obvious to me that investors of all types grossly overpay for investment management assistance.  I have come to believe that using a well-diversified portfolio of low-cost index funds and rebalancing periodically is the right course of action (took me long enough to figure that out!).

However, I have become more aware that people are poor consumers of investment products.  In many cases, they do not fully understand their fees, have difficulty assessing value and shopping for services, and pay for services which provide little return. Unfortunately, many consumers evaluate their advisers on a more personal level, instead of a financial one. (I am not suggesting that the personal relationship should be entirely overlooked.  Consumers need to trust their adviser.  The question is at what cost should they pay for that trust.)

This was reinforced in a video blog that was promoting methods for financial advisers to provide value to their clients.  In this particular example, the story was of an adviser that worked with high end clients – you know, the multimillionaires that have everything they could possibly want.  He knew one of his clients enjoyed classical music so he had arranged (which I assume to mean purchased) an opportunity for his client to conduct the local orchestra (it was a major large city orchestra) at a practice rehearsal. As the story goes, the client was absolutely thrilled.  I imagine he was.  This reinforced his relationship with his adviser and he received referrals as a result.  Ka-ching!

I might be wrong, but I would assume that the adviser is making good revenue off of managing this client’s account.  That is fine – so be it if the client wants to spend money this way.  But is the client guilty of overlooking the fees he is paying on his investments simply because the adviser does this type of thing for him?  Does he get this gift and then have a meeting where they drill down on fees and value?  Again, I might be wrong, but I assume not.  It is an implied quid pro quo, isn’t it?  I do these things and you keep paying me?

So what was my Aha! moment?  As I was relating this story to my brother, he interrupted me and said he knew exactly why this happens -client ego.  Of course!  What advisers accomplish with their client appreciation events, quarterly account reviews, tickets to the game, etc… is to make their clients feel important.  AND HERE IS THE KEY POINT: They make their clients feel so important that they are less likely to examine the real value they are getting in asset management and other investment service fees.  This applies to investors of all types – not just the big shot clients.  Ego gets in the way of humility and modesty and impacts our life in many ways.  It is no different in how we purchase investment guidance. And don’t think the financial services industry isn’t well aware of that!!

What do you think?  Does your ego affect your investing?

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