Clients Are Financially Savvy, and Other Myths

Again, apparently we're on different planets: I recently had "minor" heart surgery, and I can say with certainty that my surgeon got paid exactly the same whether the operation was a success or not. In fact, should it turn out to be only "partly successful," he'll get paid 100% more when he does the procedure again. The same is true for accountants and lawyers on the respective services they provide, for which they mostly bill on an hourly basis, regardless of the outcome to their client(s).

In fact, the reason why it's "illegal" for accountants to get paid based on how much they reduce my taxes (of which I am aware, but wish it were otherwise), is because, in addition to their clients, CPAs also have fiduciary duties to the "public" and to the government. Talk about conflicts of interest. 

But what really has me scratching my head is Derek's concern about "very questionable conflicts" inherent in professional performance fees. What conflicts? Where's the conflict if an accountant enables a client to pay the least amount of, legally permissible, taxes? (Cheating on taxes would be a risk that's not in the clients' best interest.) Or doctors getting paid for increasing one's life expectancy? Or criminal lawyers, for keeping their clients out of jail? Or my mechanic, for getting more mileage out of my truck? Maybe he's using a different definition of "conflict," but usually these situations are described as an "identity of interest." 

Finally, Derek also takes issue with the notion that retail investors can be their own worst enemies: "The numbers I see show exceptional behavior by the average investor…Are you telling me that a client who walks into my office with a few million dollars is someone likely to exhibit bad behavior?…The so-called "behavior gap' is built on bad data." 

Now, tell me: Is it just me? My first response to Derek: If your clients are such great investors, why do they need you? And second, apparently on Derek's planet, they haven't yet invented "Behavioral Economics." But here on Earth, academics who study how retail investors actually behave have amassed about 30 years of research that pretty conclusively shows most of us are financial idiots, and will die broke without professional help.

For a compendium of this research, I'd suggest picking up the book Investor Behavior: The Psychology of Financial Planning and Investing by H. Kent Baker and Victor Ricciardi (John Wiley & Sons, 2014). 

So, yes, Derek: I am telling you that unless your millionaire client works in the financial services industry (and even then, it's 50/50), he/she is very likely to exhibit bad investing behavior.

And in my 30 years of talking with financial advisors, you are first one I've come across who seems to feel his/her clients would be financially just fine without him/her.