Trust is a difficult thing. No matter what the context is, it can be difficult to know whether or not you can trust the person with whom you are interacting. How do you know whether advice is respectable advice or if someone is just selling you snake oil? Is there an acid test for trust? Is there a question that we can ask ourselves that could give us any insight into the trustworthiness of a claim or of the person who offers it? Yes, I think there is…
Here’s the simple question you need to ask yourself whenever you find yourself in the position of having to trust someone’s advice: what does the person stand to gain from me taking his or her advice? It doesn’t matter who the person is or what they’re selling, the more they are likely to benefit you listening to their advice the less you should trust it.
Think about politics. When a politician makes promises, he or she typically has an agenda. How will the claim help them get reelected? Or think about certain news sources—are they spinning the story in a certain way in order to get more attention and drive ad revenue? What about when you’re buying a product, say a new TV? Do you visit the manufacturer’s website to see what the company says about its own products. Well, you might start there. But if that’s all you do, then of course they’re going to say the TV is great—it’s their TV! If you want to get more trustworthy reviews, you’ll visit a neutral site where other consumers tell you the pros and cons of the TV you’re looking at—based on their own experiences.
Now, think about your investing strategy. When it comes to investing, who do you trust for advice? Many investors fall into the trap of relying on the information provided to them by their brokers. They’re financial experts, right? They know the market, don’t they? Well, sure they do—in the same way that TV manufacturers understand televisions. But just because they know what they’re selling, doesn’t mean that they’re selling what’s best for you. On the contrary, they are more likely to be selling what’s in their best interest rather than in yours. Brokers, while they may call themselves “advisers” aren’t really advisers so much as they are salespeople.
In his 1976 book The Pillars of Investing, William Bernstein famously said, “Brokers service investors the same way Bonnie and Clyde service banks.” Some brokers may be good people who really believe in what they do. But, regardless of what they want to believe about themselves, self-interest is built into the role systematically. They represent the firms they work for more than they do their clients. They don’t want to help you achieve success; they want to help you help them achieve success. That’s just the nature of the beast.
So, here’s a question: if you can’t trust your broker, who can you trust? The answer is simple: look for neutral advice. Ask people whose income doesn’t change regardless of what you choose to do. If you would like a basic primer on how to discern between the good advice and the bad, feel free to reach out to us for a complimentary consultation. Financial advice is everywhere around you—knowing which advice to ignore and which advice to consider will mean the difference between your failure and success as an investor.