By Lacey Filipich BEng(Hons) MAICD
In my professional past, I spent a lot of time flying into mining sites for a substantial fee to tell management teams two things:
- Your only targets should be Safety, Volume and Cost. The rest is window dressing.
- Stop doing most of what you’re doing. Just do a few things, do them properly, and be relentless in your de-prioritisation of the distracting crap.
The KPI targets and the contents of the not-to-do lists vary, but the concept is essentially the same everywhere. We have too many targets and too much to do, so we lose sight of the important stuff. It’s part of the human condition.
In my advice to their bosses, I add a third point: the management team bonuses should be delayed by two years. Why? Because they should not reap the rewards of meeting their targets until it can be shown that those results are sustainable and they did not cause long term damage by making poor decisions. Paying them in the same quarter or year as they achieve the targets means they have an incentive to rape and pillage with little thought to the future. It may not be the most significant incentive and it raises uncomfortable issues of trust and integrity, but it’s there.
So what the hell has that got to do with the Senate inquiry into the poor financial advice some of our biggest banks have been giving their clients?
It’s all about motivation
If a manager at a mine site has a KPI to hit a production target that will give him or her a 30% bonus, that’s a big motivation to make it happen.
If the manager has that same production target plus a KPI to have no injuries, it’s going to motivate them to make it happen safely.
You can end up with two significantly different action plans just by introducing the second safety target.
Motivation is key.
With respect to the financial advice industry, consider the motivations of those providing the advice. For example, the banks who are ultimately beholden to shareholders:
- What do shareholders want?
- Growth and dividends.
- How do banks achieve that?
- Making money.
- How do they make money?
- By loaning cash then charging their debtors interest (among other methods).
- Therefore what is the bank motivated to do?
- Lend you money – via mortgage, business loan, margin loan, credit card etc.
- Hold onto your cash – because for every $1 sitting in your savings account or term deposit, they can lend $10 to another person… see the above point.
When shareholders measure only growth and dividends, that’s what they’ll get.
When executives are paid on their ability to deliver against these targets, that’s what they’ll work towards.
Banks are exceptionally effective at meeting the shareholders’ expectations. Going to a bank for financial advice when they have such targets is asking to be directed towards either giving them your money to hold in savings or taking a loan with them.
As a result, I’m happy to own bank shares, but you’ll never catch me taking their financial advice.
How about an independent financial advisor? They are motivated by how they get paid, which may include:
- An hourly rate that is not reliant on performance.
- A cut of the profits you make from their investment advice.
- Bonuses paid by their employer for meeting a specific KPI (perhaps the % of their clients signing up to a particular investment tool, or customer satisfaction).
- A kickback from the seller of a particular investment tool.
Fortunately, the organisations providing certification to financial professionals offer a degree of security in that they all have something resembling an honour code. A qualified financial planner or advisor is required to provide full disclosure of any potential conflict of interest between their income and your needs as a client. They should also give you an honest answer when you ask them directly how they get paid. There is also the added motivation to keep you as a long-term client, which should result in a desire to do the best by you so they can keep you.
But there are no guarantees.
Although fictional, the movie Margin Call has a chilling moment in the boardroom when Kevin Spacey’s character points out that when the investment firm executes their plan to offload 95% of their holdings within a few hours that they will never sell to those clients again. They simply won’t have the credibility and having screwed so many people over to such a degree, their reputation will be in tatters. I won’t spoil the movie for you, but let’s say it’s conceivable that this could happen. After all, the primary responsibility of a board is to the organization – not the employees, not the customers. The organization’s survival is paramount, and to not ensure that would mean the directors were negligent in their duties. As I keep saying, it all comes back to motivation.
The bottom line: you get what you measure.
If you go to someone who will make money based on your financial decisions, and the amount they make will vary depending on what decision you make, that’s a big motivation for them to do what comes naturally to us all: put themselves first.
What can you do about it?
You can wait for the system to reform, for example stronger regulation of the financial industry prohibiting kickbacks or bonuses – but don’t hold your breath, and someone will always break the rules.
You can rely on the compensation payouts some banks are now making due to their poor advice – hopefully you don’t lose your house while you’re waiting.
You can put it all in the too-hard basket and plan to live on the pension, just above the poverty line – gee that sounds fun (not).
I prefer to take action now to look after myself. Perhaps you do too. In that case, I see two options:
1. Pick your financial advisor/planner VERY carefully
Do your due diligence:
- What is their track record? Ask for raw numbers, not their calculated year-on-year %’s as these can be misleading.
- How do they get paid?
- Do they have any conflicts of interest?
Of all the options, paying someone a flat fee regardless of performance is probably the safest way to go to get unbiased advice if they do not have any motivation to sell you a particular product (e.g. kickbacks or bonuses for targets met). But then you’re motivating them to either:
- Do the work as quickly as possible if you pay a flat fee regardless of hours – can result in substandard work.
- Spend a lot of time doing the work if you pay by the hour – can result in higher than needed costs.
It’s not easy to decide the best way to go.
In their defense: if you find a good planner or advisor and they do the right thing by you consistently, stick with them. By all means, stay on top of what they’re doing to ensure they continue to meet your performance expectations,– but if you’re onto a good thing, there’s no reason to stop.
Not surprisingly, I err toward option two…
2. Learn to do it yourself
Managing and investing your money can seem overwhelming because there are so many tools and products available. The possible portfolio combinations are limitless. It’s enough to freak most people out, which is why they abdicate responsibility for their financial decision making to a paid advisor or planner.
Money is nowhere near as complicated as it’s made out to be.
You can learn most of what you need to know reading a few books, perhaps taking a course or two, and then rolling up your sleeves and having a crack at it. You will make mistakes – it’s inevitable. But in the long run, you’ll develop your own ability and confidence, and there will NEVER be a conflict of interest issue between you and yourself.
I recommend two books to get you started:
- The Richest Man in Babylon, by George S. Clason
- Rich Dad Poor Dad, by Robert Kiyosaki.
They’re enough to put you into action straight away so you may not need anything else.
If you want more information, Money School can help – check out our course. Our aim is to give you the skills to make your own decisions. We do not provide financial advice or planning, so by definition we can’t have a conflict of interest with you. Also we’re a damn sight cheaper than the average financial planner or advisor!
Above all, remember:
It’s YOUR money.
It’s YOUR future.
It’s YOUR responsibility.
Whether you sign up with a financial planner or do it yourself, you cannot abdicate responsibility for financial decisions. There’s too much at stake. Don’t let yourself be fooled by a few fancy charts and some fabulous reports. Take the time to interrogate your chosen strategy and the potential risk and results. And always consider – what is the motivation of the person advising you? What’s in it for them?
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Lacey Filipich is the co-founder and director of Money School. She helps parents raise financially savvy kids and helps adults get on top of their finances. Connect with her on LinkedIn and follow the Money School Facebook page to learn more.