“You gotta be careful if you don’t know where you’re going, otherwise you might not get there.” - Yogi Berra
How can you tell whether financial advice you receive is real financial advice or financial quackery?
Much of what happens in the financial industry is financial quackery, but because the common methods are familiar to most of us, they appear normal. You can’t really see how inadequate and funny many financial procedures are until you compare them to other fields.
“Quackery” is a fun word that normally refers to medicine. It is a type of health fraud that promotes products and services that have questionable and unproven scientific bases.1
Unproven, usually ineffective, and sometimes dangerous medicines and treatments have been peddled throughout human history. “Snake oil salesmen” heavily promoted “patent medicines” that promised to be a “miracle cure” for everything. Most had no healing ingredients and many contained alcohol or morphine to simply make the patient feel better.
How can you tell the difference between advice and quackery in medicine? The issue is not whether the product actually works or even whether the promoter “quack” honestly believes it works. Penicillin is often called a “miracle cure-all”. It clearly has medical benefits, but mass promoting it for everyone would obviously be quackery.
You can identify quackery by:
- The focus on selling the product or service
- Without using accepted standard medical diagnosis and treatment.
Advice must be specifically for you. No treatment is for everyone. Essentially any promotion of medical treatments is quackery unless you have been checked or tested by a qualified doctor to diagnose that you have the condition and recommend the proper dosage and use of the treatment.
What is Financial Quackery?
The financial world is also full of quackery. Just like there are established medical procedures for diagnosis and treatment, there are established procedures for financial advice. Any qualified financial advisor knows the “6-Step Process to Financial Planning”. Step 2 (determining your goals) and step 3 (analyzing your full financial position) should both be done before making any recommendations in step 4 (developing and presenting a written financial plan).
Recommending a product before setting goals, analyzing your entire financial picture and creating a financial plan is not following accepted financial planning procedures, which makes it financial quackery.
Financial quackery is essentially any promotion of financial products or services by someone that does not know your goals and your full financial position. Just like with medical quackery, the emphasis is on selling products, instead of providing real advice.
Why is it a Major Problem for Canadians?
In our opinion, financial quackery is one of the main reasons that most Canadians struggle financially. Because of it, most Canadians don’t set financial goals, make financial decisions one-by-one, don’t look at their entire financial picture – and don’t even realize that they did not get real advice.
For example, here is a typical scene. You have $5,000 to invest and go to see a financial advisor. The advisor does some chit-chat to establish rapport, and then asks you to fill out a Risk Tolerance Questionnaire. Then he recommends you buy Funds A.and B in your RRSP. This is financial quackery.
Can you imagine this in another field? Can you imagine going to see your doctor who asks you to fill out a Pain Tolerance Questionnaire and then prescribes a treatment? That would be ridiculous.
No examination. No medical history. No medical tests. And the treatment is not the most effective treatment but the one that fits your “pain tolerance”. Obvious quackery.
Why specifically is it financial quackery? Making recommendations after only knowing your risk tolerance is ridiculous. The “advisor” must know your entire financial position and your goals before making any recommendation.
Without knowing your goals and your entire financial position, the advisor does not know:
- Is this money for your retirement?
- Do these investments have the growth potential to achieve your goals?
- Is $5,000/year enough for you to have the retirement that you want?
- Given your tax position today and in retirement, do RRSPs even make sense for you?
- Given your tax bracket today, is $5,000 a smart amount to contribute?
- Is there something smarter you should be doing with that $5,000?
- Is it smarter to invest in your name or your spouse’s?
- Do Funds A and B fit with all your other investments? Are you properly diversified?
- Is your overall investment allocation suitable for your goals and your risk tolerance?
Many doctors consider homeopathic medicine to be quackery. While most of it has never been tested for effectiveness in proper medical studies, at least some of it probably works. The biggest problem with homeopathic medicine is when you use it INSTEAD of following your doctor’s advice.
That is also the biggest problem with this story where you put $5,000 into an RRSP with an advisor to buy 2 funds. After seeing this “advisor”, you may be tempted to believe you received real financial advice. But there was no real advice. You just had a financial “quack” do a transaction for you INSTEAD of giving you real advice.
How Can it Ruin your Retirement Plan?
To clearly illustrate the problem with financial quackery, here is how it ruins the retirement plan for most Canadians.
One of the most common investment errors in our experience is investing too conservatively to achieve your retirement goal – and this error most often results from financial quackery. The problem is that you may sit down with some advisor (a.k.a “financial quack”) who fills out a Risk Tolerance Survey and determines that you are “conservative” and then recommends you “diversify” into a low risk, low return portfolio. This low risk/low return portfolio may have a low risk of temporary market decline, but may very likely have a 100% risk of failure to fund the retirement you want. What’s more – you don’t even know about this 100% risk of failure. This “safe” investment may make you feel good, just like the “snake oil” made you feel better by containing alcohol or morphine. But it is certainly not effective in treating your financial goals.
This is a huge problem with retirement for Canadians. We have sat down with literally thousands of Canadians to help them figure out specifically what lifestyle they want to have in retirement – in detail, expense item by expense item. Then we figure out the nest egg they will need and what they need to do in order to build up that nest egg. Our experience is that what Canadians are doing will leave them far short. What the people we have met were doing before we met with them will, on average, give them only about 20-30% of the nest egg they will need to maintain their current lifestyle.
Why will they have so shockingly little in retirement? When we ask them, they say they never received retirement advice before. They have retirement investments, but no specific retirement goal. In our opinion, that unfortunately means they worked with “financial quacks” INSTEAD of getting real advice.
Making an Informed Decision about your Risk Tolerance AND your Goal
Imagine that you need to be in Los Angeles for a meeting tomorrow morning. You go to a trip advisor who gives you a “Fear Tolerance Questionnaire” and determines that you have a low fear tolerance. You could fly, drive or walk to L.A. Since you have a “low fear tolerance”, the trip advisor recommends you walk. Obviously, that is quackery.
Real advice needs to take into account your goal. You need to be told that if you walk, you will not be there for the meeting at all. Period. If you drive, you must leave now without packing or stopping for anything (even meals) and you must drive right through the night.
Your best advice is to pack properly and get there early by flying. So let’s discuss your fear of flying. You need to know that there will be turbulence, but that it will be okay. You may fear flying, but statistics show that flying is quite safe – as long as you don’t get off when there is turbulence or during the stops along the way.
You may fear flying, but it provides by far your best chance of success in achieving your goal.
This does not mean you definitely must fly, but if you choose not to, then you need to know now that you will not be at your meeting. You will need to plan now to postpone your meeting or meet somewhere closer. Or you can choose to fly, even though it scares you. It provides the highest chance of success, but you need advice on what you can do to fly effectively and deal with your fear.
This is similar to retirement planning. Your retirement nest egg can be in stock market investments, bond/income investments, or GICs/cash. Most Canadians will need to have a significant portion or even all of their retirement investments in the stock market to have the best chance of maintaining their current lifestyle after they retire.
The problem is that most Canadians have only been asked their risk tolerance and don’t know their goal. So, they are walking or driving to Los Angeles and don’t even know they will miss the meeting.
When you know both your retirement goal and your risk tolerance, you can make an informed decision:
- You can buy GICs, but you need to know now that you will almost definitely not maintain your existing lifestyle after you retire. You should plan now what specifically you will cut back, so it is not a shock when you get there. Downsizing your home will probably be just the start. That is why we call GICs “Guaranteed Insufficient Cash”. We have not seen anyone successfully save for a comfortable retirement with just GICs.
- You can invest conservatively in bonds/income investments, but then you may have to work hard to save every possible penny and possibly even cut back your lifestyle today.
- You can invest in stock market investments, but you have to know there will be turbulence – but it will be okay. Statistics show it is reasonably safe if you invest long term in the proper way and don’t get off when there is turbulence.
The point is that with real advice, you can make an informed decision about this tradeoff between your goal AND your fear tolerance. With the quack’s approach, you will just find out tomorrow that you didn’t make it to the meeting, after it’s too late to do anything about it.
In our opinion, financial quackery is one of the main reasons most Canadians struggle financially. Because of it, most Canadians don’t set financial goals, make financial decisions one-by-one, don’t look at their entire financial picture – and don’t even realize that they did not get real advice.
Financial quackery can ruin your retirement plan by not letting you make an informed decision about your risk tolerance AND your goal. It can lead you to invest too conservatively so that you have a high risk of failing to have the retirement you want.
It is common because very few Canadians know precisely what their goals are and because very few financial advisors follow the “6-Step Process to Financial Planning”, which should include preparing a written plan to document their clients’ financial goals and complete financial position.
Financial quackery is any financial “advice” you receive that does not look at your entire financial picture and your specific financial goals.
Now that you know what to look for, it can be fun to quack like a duck when you recognize it.
About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching. If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com. You can read his other articles here.