This past week, Canada’s Globe and Mail published an article that might as well have been an outtake from my book. “Pervasive sales culture at Canadian banks designed to push customers into high-fee products” was the title, and also makes a great one-line article summary.
One of the themes I write about is how difficult it can be for clients to know if they’re getting good advice. In Canada, the big banks are a “default” choice for many, even as their wealth grows to a size that allows them far better options.
I’ve received a ton of feedback since releasing Low Risk Rules last year, including from commissioned advisors who claim that I was a bit too rough on them. It could have been even worse! At the last minute, I deleted an entire section that discussed the pervasive sales culture in our industry. It’s not in the book’s print version, but if you’d like to read it, I’ve dropped it at the end of this post.
But first, back to the Globe article. It sits behind a paywall, so for those of you who can’t see it, I thought it would help to pull out some key sections. There is so much good stuff here…
Most bank advisers and planners are evaluated on whether they hit sales targets. Top performers are celebrated with galas and prizes. Underperformers are shamed and held back from promotions. “There is just extreme pressure on people to meet quotas, right from the tellers up to what they would call a financial planner,” Ms. Bolstad said. “It’s an obsession.”
…
It’s a system the banks have fought to keep in place. Investor-friendly initiatives tend to get watered down, delayed or thwarted in the face of industry lobbying, said Andrew Teasdale, an economist and independent financial consultant who has spent 15 years pushing for changes to Canadian securities regulation.
There are just too many problems associated with a system of financial advice based on commissions and sales, Mr. Teasdale said. Advisers are motivated to put clients into expensive, actively managed strategies over cheaper index funds. “There’s a kind of cultural submission to this model in Canada,” he said. “I find it difficult to understand why it’s allowed to persist.”
…
In 2017, all five of Canada’s largest banks settled with regulators after it was found they had overcharged customers for investments – “excess fees” that amounted to tens of millions of dollars. In some instances, banks sold investment funds that had an embedded yearly trailer fee for the adviser, even though the customers were fee-based clients who were already paying a fixed annual fee to have their investments managed.
In other cases, clients who had a high-enough account size were not notified when they became eligible for lower-fee versions of investments.
In all five cases, the banks repaid millions of fees to clients.
And while the banks have reported they have cleaned up their procedures that did not detect the excess fees, the incentives built into the financial advice system remain largely the same.
Bank advisers are still subjected to sales targets, which can put their own interests at odds with the client’s. “Nothing will change unless the compensation methods change,” said Scott Plaskett, chief executive of Ironshield Financial Planning. “When your compensation comes from sales and not from the delivery of advice, there is always the potential for problems.”
The whole article is worth a read. And I implore you, if you assume you are “safe” because your investments are with a big-name investment firm… think again.
What follows is an outtake from Low Risk Rules: A Wealth Preservation Manifesto.
“Eat what you kill.”
I first heard this expression in my early 20s when I interviewed at a prestigious bank brokerage firm. I’m not going to mention which one, but they had the nicest statements with a really upscale font, and I was excited to be considered for a role there.
“I don’t care if you’re the next Warren Buffett,” I was told. “If you can’t bring clients in the door, you’re not going to succeed.”
It was disillusioning to hear this because at this early stage in my career I still had this idealistic vision that if you did good work, you would naturally be rewarded for it. As I spoke with people at different brokerage firms, it painted a picture of a culture I just didn’t feel comfortable with. It was a numbers game. “Rookies” would be expected to make a minimum number of calls and at the end of each week the new assets each brought in would be posted up on the wall for all to see. The idea was to stoke competition among the recruits. The reality is that most wouldn’t make it out of year one.
“Come back for a second interview,” I was told, “and bring back a list of 50 friends and family you’re going to approach about becoming clients.”
For obvious reasons, the idea of using my friends and family as a launching pad for a sales position left a foul taste in my mouth. I never returned.
Another firm gave me an aptitude test, which I quickly realized was all about sales skills. I tried to fill it out with the answers I thought they would want, but still never heard back. The test was probably structured well enough to filter out the people only pretending to be status-seeking extroverts because they want a job as a broker.
Look, there are good people who work at these places. They have come up through the culture with their integrity intact and do the best for their clients. I know they exist, because I know many of them personally. But when you build a culture of incentives around selling, you make it hard for these quality people to survive and thrive. And you subtly change them over time. I’d love to tell you that if I worked in such an environment for a couple of decades I’d be the same person I am today, but the reality is that I probably wouldn’t.
In pursuit of profitability and efficiency, the brokerages are constantly thinning the herd, dismissing the least profitable advisors and reallocating their clients to the ones at the top. And so it becomes a literal fight for your business… each and every day.
As Upton Sinclair famously said, “it is difficult to get a man to understand something when his salary depends upon his not understanding it.” It’s easy to convince yourself that what you’re doing is best for your clients when your job depends on it.
As a prospective client, you should understand that the incentives this industry has put in place for advisors have nothing to do with helping you succeed.
Loved this article, it really resembles with some things we discussed. I still don't know what to think about this world. I'm terrified to think it is the way you mention and also feel very identified with that quote from your first interview.
Thank you for sharing Geoff!
Great Article!