Financial Traps Awaiting the Professional and How to Overcome Them –Part 4


Now for our final post related to our Financial Traps series. These final two traps are generally less harmful than the previous three, but occasionally they can cause dramatic harm to a professional’s financial health.

Blind Faith In Other Professionals

Many professionals spent a good portion of time in post-secondary education gaining specialized knowledge to enhance their ability to be an “expert” in their field. The more advanced the specialization, the more respected that individual becomes. There are numerous logical benefits from society relying on specialization and I would not argue against this overall trend. In most fields of professional work, the interaction with clients is structured to attempt to minimize conflict of interest and maximize the beneficence to the client. A code of ethics and regulatory body exist in the background to act as oversight of quality. Many professionals will often assume that the financial planners and investment professionals operate in a similar setting. They also may assume their access to high net worth advisors or special investment opportunities implies higher quality and expertise.

I don’t want to imply that all financial planners or asset managers have poor ethics, but the way the industry is structured creates real areas of concern. The conflicts of interest with either commission-based or percentage of asset based fees are real and significant. There has been recent regulatory changes that have lead to improved transparency on fees paid,  but the overall payment model needs revamping.  Engineers, lawyers, accountants, dentists, and doctors are largely paid on a salary or fee for service based model. There really isn’t a valid argument why managing $100 is any more difficult than managing $100,000, yet the compensation for the planner is literally 1000x larger to manage the bigger portfolio. This applies immediately and continues as long as the client stays with them. The time it takes to structure, discuss and execute a proper financial plan should be adequately compensated. Yet paying fees in perpetuity for an initial plan that is re-evaluated once per year or occasionally when you ask simply isn’t fair.

Choosing a financial planning professional is a very complex topic and deserves its own detailed post (I’m very opinionated on this topic!), but for now these are the simple rules to follow until you can raise your financial IQ further:

  1. Don’t Avoid Financial Planners – While your financial IQ is low, you NEED a financial planner. Although my long term advice will be to cut fees and possibly move to managing your financial affairs independently once your financial IQ improves, you likely are not ready for this yet
  2. Stick to the Majors – Stick to well-known financial institutions (major banks or MD management) for planning purposes while your financial IQ is low. Don’t get me wrong, all of these are sub-optimal overall and I currently have no investments within them. There are definitely better financial planners and investment managers out there, but staying with this type will at least guarantee you get all the conventional advice and close to average returns while you work on building up your knowledge. Boutique or high net worth specialists may have fancy sounding strategies and investments that are of value, but you have no ability to differentiate if you are being helped or swindled. Once your financial IQ is increased, you can better discern if these strategies will help or hurt you.
  3. Never Give 100% Control -Be wary of giving any financial professional sole authority to move funds or trade your money independently. While your financial IQ is low, this will at least protect you from having your money stolen from you. This sounds far-fetched, but I have met 3 people that have been swindled out of life savings. This is not meant to paint the whole group of independent brokers or private investment managers (PIM’s) in a negative way, but protecting yourself from fraud is important.
  4. Avoid “DSC” funds – these funds will require you to a pay a hefty penalty if you sell the fund any earlier than seven years from when you purchased them. The penalty occurs because the advisor working on your behalf receives a huge windfall of commission at the beginning of the purchase. The penalty for selling early compensates the fund for this commission they paid your advisor and is based on how much they would make for having your investments for a long period of time. DSC funds leave you in a very inflexible situation. They pay your advisor greatly for future services you may never receive. No load or front end load funds give you more flexibility to move your investments when you are ready.
  5. Remain engaged, proactive and inquisitive – The more you ask, the more you might learn. Read around discussion topics and then ask more questions. As you gain more independent knowledge, you can weigh the advice you receive against what appears elsewhere.

Over-Confidence In Your Own Ability

Another common mistake for the professional is over-confidence in their own abilities and general intelligence. After some initial financial education, they decide to take matters into their own hands and direct their investments. The problem is that a huge portion of investing success relies on temperament, not intelligence. It relies upon acting in a contrarian manner and having immense fortitude to ignore the strong emotive responses that market fluctuations create. An incredible amount of research has been performed on the many cognitive biases that influence investor psychology. A book such as The Little Book of Behavioral Investing is an excellent starter into the subject and Nobel Prize winner Daniel Kahneman’s seminal work Thinking, Fast and Slow delves deeper into the subject matter. Many professionals fall victim to these cognitive biases because they are used to having confidence in their decisions related to their professional life. This is valid in their professional life where the confidence is based on a solid foundation of learning and experience. Confidence based on superficial knowledge and inexperience is fraught with disappointment in the investing world.

Unfortunately, there is no guaranteed way to avoid the pain of your behavior interfering with your own investment success. The difficulty is the changes you make would be with the belief you are improving your circumstances, not hindering them. I personally believe that behavioral finance concerns and cognitive biases that exist in all of us is the main argument for having a financial planner or investment advisor. A professional can help sway your misjudgment at least some percentage of the time. As someone without a financial planner or advisor acting on my behalf, I try my best to constantly evaluate my performance with our financial planning against a traditional financial planner model to ensure I’m not falling victim to these cognitive biases. I recognize that I might become my own worst enemy, and have an alternative investment plan if my investment goals and results are suffering.

Have you experienced any problems with blind faith? Do you have any insight into your own investment mistakes? Please share to help each other and facilitate discussion.

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3 comments On Financial Traps Awaiting the Professional and How to Overcome Them –Part 4

  • New reader, looking forward to ongoing posts.

    My wIfe and I are both physicians incorporated under one corporation paying ourselves dividends. We currently have a financial planner/manager looking after our investments.

    Should one’s investment strategy be different if majority of funds are being invested within a corporation? Current strategy involves primarily Canadian dividend producing stocks due to favorable taxation. They feel this produces more stable and higher income than ETF based strategies. Thoughts?

    I’m hoping to start managing things independently in the near future, but am struggling with the traditional ETF based strategy vs more of a Canadian dividend strategy and the tax implications of either within corporations and seem to get conflicting answers depending on who I speak with (MD vs current advisor vs internet).

    • Hi Phil

      Great question! I will eventually be covering tax efficient investing within a corporation, but will quickly give you the key variables in my opinion.

      1. There is an ETF that will mimic almost every dividend strategy or broad index possible at a lower fee than any investment manager or mutual funds.
      The dilemma with ETF’s is you need to be ready to make the jump to be a do it yourself (DIY) investor which also means DIY financial planning. Financial planning for doctors can be more complicated than average DIY investors. This is why I am slowly working my way through the topics, as I dont want people to jump into ETF’s without any financial planning skills to do it all by themselves.

      My overall opinion is an ETF/broad index portfolio will beat the vast majority of managers simply because of the fee drag. There are alot of variables there so stay tuned for that discussion.

      2. I invest the majority of our assets through a corporation as well and do primarily dividends out from the corp also.
      Aiming for investments that have either capital gains or Canadian stocks that produce dividends is the most tax efficient strategy in a corporation.

      Foreign (including US) dividends will be taxed like normal income which is taxed highly in the 40ish % range depending on which province. Regular income from bond-like investments are also taxed unfavorably in this range.

      Almost all my investments only produced dividends or capital gains, but I would say the quality of the investment is more important than tax efficiency. The selection of quality shouldnt be much different in the corporation than if you were doing all the investments in a personal non-registered account. You want to find something you feel confident will give good long term returns and will be doing well if you can match the broad indexes overall. My feeling is saving 1-2%/year in fees via an ETF based investment strategy vs the extra cost from paying for investment advice will likely produce far more wealth for you then the most effective tax minimization for your investments.

      Hope that helps!


  • I went to MD management for a consultation once. Fancy office, free coffee, friendly and smiling staff.

    We sit down and they do some preliminary review of our situation. I then start to ask questions:

    1. How long have you been doing this for? (10 years)

    2. What is your net worth? (The lady nearly falls of her chair and refuses to answer. I mention to her that I once asked my personal trainer how much he could bench press and he had no difficulty in answering this immediately. She remained unmoved.)

    3. Tell me about your own investment portfolio and how you chose your allocations. (She used proprietary MD management funds and it sounds like she basically had the MER greatly reduced or waived because of her employee status).

    My wife and I stand up, put our coats on, and walk out of the office.

    No thanks…

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