“Whenever we decide what product to buy, what investment to make, or what medical treatment to obtain, we often rely on expert advice. But what happens when advisors receive bonus payments for recommending certain products, investments or treatments? In a series of experiments with university students, we provide evidence that advisors may in these cases engage in self-deception, convincing themselves that the bonus product is also the better one, which allows them to maximize their payment while maintaining a moral self-image.”
Its a study by Gneezy, Uri/Saccardo, Silvia/Serra-Garcia, Marta/Veldhuizen, Roel van: “Bribing the Self.” You can read a summary here as we posted on our web site.
They talk about 3 types of advisors. First, there is homo oeconomicus, who cares only about his self-interest, and therefore always chooses the advice that comes with the highest commission. Second, there is homo moralis, who cares about behaving morally and therefore always chooses the advice that is in her client’s best interest. Finally, there is an intermediate type of advisors who want to behave honestly but are not totally certain about what honest behavior entails. These advisors may in some cases be able to conveniently deceive themselves into believing that the advice that maximizes their self-interest is also the one that is most beneficial to the client. Specifically, these advisors may be able to convince themselves that the product or treatment that comes with the highest commission or bonus is also in their client’s best interest. This allows them to retain a self-image as a moral person while still maximizing their income and thereby effectively get the best of both worlds.
As a client, could you tell the difference?
You can meet advisors who are convinced what they are selling is in your best interest, but whilst they want to behave honestly, self-interest kicks in. Have you ever heard of the term ‘vertical integration’? Its when a product provider wants to control the investment product and the client relationship. There are countless firms like this, but they don’t appear to be.
Over 25 years ago I met an insurance salesman at an industry event. Today, he would be called a financial adviser. His clients thought he was great. He was friendly, funny, persistent, a little over-talkative, but he didn’t know what he didn’t know. He was far from ‘shady’ if I can use that term, but I believe wanted to behave honestly. There is no doubt he convinced himself he was doing the right thing. In reality, it was more about ‘selling’ than ‘advising’. His self-interest kicked in.
We live in a different world now. It is possible to find homo moralis. It means you to have to do more research, ask more questions to satisfy yourself about conflicts of interest, bearing in mind everyone you talk to is exceptionally likeable. It goes with the territory. One hopes you will not encounter homo oeconomicus, but they still exist. The majority still fall into the intermediate camp, just like the insurance salesman 25 years ago…identifying who falls into which camp will always be your problem.