Sunday, May 25, 2008
SCORPION AND THE FROG
Many of you may be familiar with the fable of the frog and the scorpion. It is a story that holds a number of parallels with the investment relationship you may have with your broker or advisor.
The story is poignant as I have recently seen a number of cases where Investors react with disbelief when they are informed that the DSC on their funds was neither necessary nor advisable. Their immediate thought is that there is a misunderstanding because their advisor would never inflate the cost of their investments by selecting the more expensive sales option. In fact, I try to explain that the advisor actually cannot help themselves. Hence the fable.
The fable involves a scorpion asking a frog for a ride on the frog's back so the scorpion can cross the stream. The frog at first declines, fearing the scorpion would sting him and he would die. The scorpion argues, quite logically, that if it stung the frog, the scorpion too would drown. Seeing the logic the frog agrees to swim the scorpion across the stream. But halfway across the scorpion stings the frog! As the frog feels his muscles begin to convulse he asks the all important question,WHY? As the scorpion struggles in the water he says he could not stop himself even if it meant he lost his life. Why, because I am a scorpion!
Advisors are trained that they are "hunters" who live off the results of their sales efforts. They work hard to find customers and get the assets transferred to their firms. As hunters, the expression is that you "eat what you kill". That translates to you earn the income you generate. More is always better and as a great hunter they have earned the income. They begin to believe that you are lucky to have somebody like them advising you. Surely they deserve to make top level income for the hard work and effort they put into investing your money. As the hunter mentality sets in they are praised by their employer for increasing revenue and achieving ever higher revenue goals. But if they fail to make the goals, they are just average hunters, no longer a part of the elite circle of top producers.
The problem is that the advisor lives in the world of the scorpion. They do not charge the highest fees to hurt the client, they charge the highest fees to maintain their position in their organization. The client becomes a means to an end and that end is to maximize revenue. How do they sleep knowing they have charged so high a fee? They sleep like babies! Their can be no guilt or shame in a scorpion acting like a scorpion!
So, the next logical question is why do investors keep letting the scorpions hitch a ride? I guess we wouldn't if we knew they had the stingers. How do you protect yourself from being a frog?
Try telling your advisor straight up that you do not want any DSC commissions charged to your purchases. In fact, tell your advisor you will pay them a flat pre-negotiated fee or move to a new advisor. If you belong to a group that has access to salaried advisors take a good hard look at the benefits of an advisor who is not commission driven. Your advisor will tell you to avoid salaried advisors as they are not up to the calibre he is. Indeed, those salaried advisors are not worthy of being called hunters!
p.s. The he and she are interchangable. Scorpions come in both sexes.